Macroeconomic Objectives · Paper 2 — Free Economics HL Practice Questions

Country X is a lower-middle-income economy in Southeast Asia. In 2015, its government launched a major infrastructure investment programme, building new ports, highways, and a national high-speed rail network. Between 2015 and 2019, Country X's real GDP grew at an average annual rate of $6.2\%$, and its gross fixed capital formation increased from $22\%$ to $30\%$ of GDP. However, construction of the rail network involved clearing large areas of tropical forest, and the new highways led to a significant increase in carbon dioxide emissions. Environmental groups argue that the country's "green GDP" — GDP adjusted for environmental damage — grew much more slowly than reported real GDP over the same period.

Country Y is a high-income member of the European Union. In 2023, its real GDP per capita was USD 45,000. The country has an ageing population and a declining labour force participation rate. The government is considering two policies to stimulate economic growth: - Policy A: A reduction in corporate income tax from $25\%$ to $15\%$ - Policy B: Increased government spending on retraining programmes for unemployed and older workers An economist argues that while Policy A might boost actual growth in the short run, only Policy B can increase potential growth in the long run.