Which public policies raise an economy's long-run growth?
Topic 5.7 Public Policy and Economic Growth: evaluate how supply-side and growth-oriented public policies, such as investment in capital, education, infrastructure, and research, raise long-run potential output.
A focused answer to AP Macroeconomics Topic 5.7, covering the public policies that raise long-run growth, including investment incentives, education and human capital, infrastructure, research and development, and supply-side tax policy, and how each shifts LRAS, with a worked question.
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What this topic is asking
Topic 5.7 closes Unit 5 by asking which public policies raise long-run growth. The College Board wants you to evaluate supply-side and growth-oriented policies, investment incentives, education, infrastructure, research, and explain how each shifts long-run aggregate supply, along with the trade-offs.
Growth-oriented public policies
Because long-run growth comes from resources, productivity, and technology, growth policy targets those determinants, not aggregate demand.
How they show up in the models
Trade-offs and limitations
Growth policy is not free:
- Cost and deficits. Education, infrastructure, and research spending raise current government spending, which can widen the deficit and risk crowding out private investment, partly offsetting the growth aim.
- Long lags. The payoff from education or research can take years or decades to appear.
- Opportunity cost. Resources devoted to growth policy could have been used elsewhere; growth means giving up some current consumption for future capacity.
- Uncertain returns. Not every project raises productivity; policy design matters.
Try this
Q1. Name two public policies that raise long-run growth. [2 points]
- Cue. Any two of: investment tax incentives, education and training spending, infrastructure investment, research and development subsidies, supply-side tax cuts.
Q2. How does successful growth policy appear in the AD-AS model? [1 point]
- Cue. As a rightward shift of the long-run aggregate supply curve (higher potential output).
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2019 (style)1 marksMultiple choice. Which public policy is most likely to increase long-run economic growth? (A) A temporary increase in unemployment benefits. (B) A subsidy for research and development and investment in education. (C) A one-time stimulus cheque to households. (D) Selling government bonds to fight inflation. (E) Raising the discount rate.Show worked answer →
The answer is (B). Long-run growth comes from raising productive capacity. Subsidising research and development and investing in education raise technology and human capital, shifting long-run aggregate supply right and increasing potential output.
(A) and (C) are demand-side, short-run measures. (D) and (E) are contractionary monetary policy. Only (B) targets the determinants of long-run growth, so it is correct.
AP 2021 (style)4 marksFree response. (a) Identify two public policies that could raise long-run economic growth. (b) Explain how investment in human capital raises potential output. (c) Draw a correctly labelled AD-AS graph and show the long-run effect of successful growth policy. (d) Explain one trade-off or limitation of growth-oriented policy.Show worked answer →
A 4-point evaluation FRQ.
(a) Policies (1 point): any two of investment tax incentives, spending on education and training, infrastructure investment, research and development subsidies, or supply-side tax cuts that encourage work and investment.
(b) Human capital (1 point): better education and training raise workers' skills and productivity, so each worker produces more, increasing the economy's potential output.
(c) Graph (1 point): a rightward shift of long-run aggregate supply (and SRAS), raising full-employment output.
(d) Trade-off (1 point): any one of higher current government spending or deficits (with possible crowding out), the long time lag before benefits appear, or the opportunity cost of resources used.
Markers reward two valid policies, the productivity link, a rightward LRAS shift, and a stated trade-off.
Related dot points
- Topic 5.6 Economic Growth: define economic growth, identify its determinants, and show it as an outward shift of the production possibilities curve and the long-run aggregate supply curve.
A focused answer to AP Macroeconomics Topic 5.6, covering the definition of economic growth, the role of productivity and the determinants (physical capital, human capital, technology, and resources), and how growth appears as an outward shift of the PPC and LRAS, with a worked question.
- Topic 3.4 Long-Run Aggregate Supply: explain why the long-run aggregate supply curve is vertical at full-employment (potential) output, and identify what shifts it.
A focused answer to AP Macroeconomics Topic 3.4, covering the vertical long-run aggregate supply curve, full-employment and potential output, the natural rate of unemployment, the link to the production possibilities curve, and the determinants of long-run growth, with a worked question.
- Topic 5.5 Crowding Out: explain how government deficit borrowing raises the real interest rate and reduces private investment, using the loanable funds market.
A focused answer to AP Macroeconomics Topic 5.5, covering the crowding-out effect, how government deficit borrowing raises the real interest rate and reduces private investment in the loanable funds market, the long-run growth consequences, and the contrast with monetary policy, with a worked graphing question.
- Topic 5.4 Government Deficits and the National Debt: distinguish a budget deficit from the national debt, and explain the long-run consequences of persistent deficits.
A focused answer to AP Macroeconomics Topic 5.4, covering the difference between a budget deficit (a flow) and the national debt (a stock), how deficits accumulate into debt, the role of automatic stabilizers, and the long-run consequences including higher interest rates and crowding out, with a worked question.
- Topic 3.8 Fiscal Policy: explain how expansionary and contractionary fiscal policy use government spending and taxes, with the multiplier, to close recessionary and inflationary output gaps.
A focused answer to AP Macroeconomics Topic 3.8, covering discretionary fiscal policy, expansionary and contractionary tools, using the spending and tax multipliers to size the policy needed to close an output gap, and the lags of fiscal policy, with full worked calculations.
Sources & how we know this
- AP Macroeconomics Course and Exam Description — College Board (2023)