Vietnam’s Infrastructure Push to Drive Economic Growth

Answer the following questions to check your understanding of the story.

What are the short-run effects of government construction of infrastructure?

In the short run, government infrastructure construction _____________.

a) increases business investment, which increases aggregate demand and real GDP

b) increases short-run aggregate supply, which increases real GDP

c) increases long-run aggregate supply, which increases potential GDP

d) increases government expenditure, which increases aggregate demand and real GDP

Wrong! - Business investment and short-run aggregate supply do not change when government builds infrastructure. Potential GDP and long-run aggregate supply do not increase in the short run.

That's Right! - Infrastructure spending increases government expenditure, which increases aggregate demand and real GDP in the short run.

What happens to the economy when roads and airports are built?

When infrastructure is built, _____________.

a) technology improves, and labor productivity increases

b) the capital stock increases, and labor productivity increases

c) the capital stock increases, and labor productivity decreases

d) the capital stock decreases, and labor productivity decreases

Wrong! - Infrastructure construction does not decrease the capital stock or labor productivity. It does not change technology.

Well Done! - New infrastructure increases the capital stock, and more capital per worker increases labor productivity.

How does the aggregate production function change as roads and airports are built?

As infrastructure is built, the aggregate production function _____________.

a) does not shift, but the economy moves up along it, which decreases potential GDP

b) shifts downward and the economy moves down along it, which decreases potential GDP

c) shifts upward, but the economy does not move along it, which decreases potential GDP

d) shifts upward and the economy moves up along it, which increases potential GDP

Wrong! - An increase in capital cannot reduce productivity or output, and it shifts the production function upward and also causes a movement up along the function.

Good Job! - An increase in capital increases labor productivity, which shifts the production function upward. Higher labor demand also causes a movement up along the function. Both increase potential GDP.

How does infrastructure construction affect the economy in the long run?

In the long run, infrastructure construction _____________.

a) increases short-run aggregate supply while long-run aggregate supply does not change

b) increases both long-run aggregate supply and short-run aggregate supply

c) increases long-run aggregate supply while short-run aggregate supply does not change

d) decreases both long-run aggregate supply and short-run aggregate supply

Wrong! - Higher labor productivity increases potential GDP and therefore cannot decrease aggregate supply. It shifts both aggregate supply curves.

Correct! - Higher labor productivity increases potential GDP, which shifts long-run aggregate supply and short-run aggregate supply rightward and generates economic growth.

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