5.7 Public Policy and Economic Growth
Growth policies raise potential output by boosting saving, investment, education, R&D, and infrastructure — anything that shifts LRAS rightward.
Policies promote long-run growth by expanding the economy's productive inputs. Investment tax credits encourage physical capital, education and training build human capital, and public infrastructure and research funding raise productivity economy-wide.
Saving feeds the machine through the loanable funds market: policies that raise national saving shift the supply of loanable funds right, lower the real interest rate, and fund more private investment. Supply-side economics adds that lower marginal tax rates can strengthen incentives to work, save, and invest.
Keep the time horizons straight on the exam. Stabilization policy (Units 3–4) manages AD to close short-run gaps; growth policy raises LRAS and potential output itself. A demand stimulus does not create long-run growth — only more resources or better technology do.
Key terms for 5.7
Drag the curves yourself — the fastest way to make 5.7 stick.
Treating a demand stimulus as a growth policy. Growth policies raise the economy's capacity and shift LRAS; AD shifts only move output temporarily relative to potential.
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