Economic growth occurs when output, or real GDP, grows. Real GDP is GDP adjusted for inflation. Normally, an increase in real GDP is accompanied by both an increase in productivity and an increase in employment. If real GDP is rising smoothly, the economy is likely to come close to achieving economic growth, full employment, and low inflation. Monetary policy involves changes in the nation's money supply and interest rates by the Federal Reserve.
Economists differ in their views of the effectiveness of monetary and fiscal policy.
C. Economic Efficiency 1. Allocative efficiency achieves the largest possible output of goods and services from the existing stock of resources and technology. A dynamically efficient economy finds the lowest-cost organizational structure to achieve technological change and product improvements. Allocative efficiency occurs when marginal social benefits are equal to marginal social costs. An amount less than the allocatively efficient amount is produced.