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Credit Sprint's Guide to Economic Growth for CLEP® Principles of Macroeconomics

5–10% of the CLEP® exam

CLEP® tests growth as its own content area. Growth means a sustained rise in real GDP per person, and it comes from more and better inputs: physical capital, human capital and technology.

What you need to know

  • Measure growth with the percentage change in real GDP per capita, not nominal GDP.
  • Productivity (output per worker) is the main driver of long-run living standards.
  • Physical capital (machines, buildings) and human capital (skills, education) both raise productivity.
  • Research and development creates new technology, shifting the production function up.
  • Saving funds investment through the loanable funds market; crowding out can slow growth.
  • Policies that promote growth: education and training, R&D support, stable institutions and property rights, incentives to save and invest.
  • Growth shows on graphs as an outward PPC shift and a rightward LRAS shift.
  • Rule of 70: years to double ≈ 70 ÷ growth rate.

Practice questions

1. An economy producing at a point on its production possibilities curve is:
  1. Experiencing economic growth
  2. Productively efficient
  3. Operating with unemployed resources
  4. Able to produce more of both goods
  5. Using fewer resources than it has
Show answer

Productively efficient. Points on the curve use all resources fully and efficiently.

2. Which of the following would shift a country's PPC outward?
  1. An increase in prices
  2. A natural disaster
  3. An improvement in technology
  4. Producing more consumer goods
  5. A fall in unemployment
Show answer

An improvement in technology. Better technology lets the same resources produce more.

3. A new technology lowers the cost of producing televisions. In the TV market:
  1. Price and quantity both fall
  2. Price and quantity both rise
  3. Price falls and quantity rises
  4. Price rises and quantity falls
  5. Price rises and quantity rises
Show answer

Price falls and quantity rises. Supply shifts right, lowering price and raising quantity.

4. A point outside a country's PPC is:
  1. Where opportunity cost is zero
  2. Where the economy is most efficient
  3. Unattainable with current resources and technology
  4. Inefficient
  5. A sign of full employment
Show answer

Unattainable with current resources and technology. It lies beyond what the economy can currently produce on its own.

5. An increase in labor productivity shifts:
  1. LRAS to the left
  2. Only AD to the left
  3. Both SRAS and LRAS to the right
  4. SRAS to the left
  5. Only AD to the right
Show answer

Both SRAS and LRAS to the right. More output per worker lowers costs now and raises potential output.