Linking Economic Indicators to Outcomes

Steps:

• Identify causal relationships: Examine how an increase in the first indicator typically affects the second based on economic principles.
• Evaluate A: Budget surplus reduces government spending or increases taxes, which can lower consumer spending.
• Evaluate B: Higher consumer spending boosts demand, leading to more hiring and lower unemployment.
• Evaluate C: Inflation raises import prices and erodes competitiveness, often worsening trade surplus.
• Evaluate D: Increased productivity means more output per worker, raising incomes and improving living standards.

Why D is correct:

• Productivity growth, defined as output per unit of input, directly enhances real GDP per capita, elevating living standards via the Solow growth model.

Why the others are wrong:

• A: Budget surplus tightens fiscal policy, curbing consumer spending through reduced demand.
• B: Consumer spending stimulates economic activity, decreasing unemployment via the multiplier effect.
• C: Inflation increases domestic prices, making exports less competitive and reducing trade surplus.

Final answer: D