Question

Why does a small difference in economic growth result in a large difference in wealth over time?

a) Because over time, small growth rates will turn into large growth rates.
b) Because over time, small growth rates will end up turning negative, preventing further growth.
c) Because the effect of compounding allows growth to build upon previous growth.
d) Because governments are more likely to support big countries than small countries.

Answer 1

The correct answer is the option C: Because the effect of compounding allows growth to build upon previous growth.

Step-by-step explanation:

To begin with, the term of "Compounding" in economics refers to the situation in which an assets' earnings are reinvested to generate more additional earnings over the pass of time and therefore that in an economy when there is a small growth the investors take advantage of the effect that the compounding has over the situation and use it in order to generate more earning in the future and that is why that the the effect of compounding allows growth to build only upon previous growth.