Principles of Macroeconomics / Unit 4 MAC 0319 worked example, 60 to 90 seconds
Which Policy Raises Long-Run Growth?
The idea
Long-run growth comes from productivity, so a policy raises it only by adding to human capital, physical capital or technology, or by improving the institutions that let those pay off. Test any option against that list. Spending on schooling and training adds human capital. Investment in equipment and infrastructure adds physical capital. Funding research adds technology. Protecting property and enforcing contracts improves the climate for all three. A policy that raises demand today without touching any of them may help a recession, but it does not raise the long-run path.
In practice
Worked example: choose among raising spending on education, cutting interest rates for a year, raising tariffs on imports, and paying a one-off rebate to households. Only the first adds to an input that productivity depends on. The second is short-run demand policy. The third reduces the gains from trade. The fourth raises consumption, which is the opposite of the saving growth requires.
Where people slip
The distinction that decides these questions is short run against long run. A policy can be right for a recession and irrelevant to growth, and the exam sets the two side by side precisely to see whether the difference is understood.
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