Question

Which of the following best describes how an outward shift of a country's PPF would be illustrated in the AD-AS model?

A. A movement to the right along the aggregate demand (AD) curve
B. The aggregate demand (AD) curve increases
C. A movement to the right along the short-run aggregate supply curve (SRAS)
D. The long-run aggregate supply (LRAS) curve shifts rightward
E. The short-run aggregate supply (SRAS) curve shifts rightward
Please explain in detail.

Answer 1

In the AD-AS model, an outward shift of a country's PPF is best demonstrated by a rightward shift of the long-run aggregate supply (LRAS) curve, indicating increased productive potential.

Step-by-step explanation:

An outward shift of a country's Production Possibility Frontier (PPF) would indicate that the country has increased its capacity to produce goods and services. In the context of the AD-AS model (Aggregate Demand-Aggregate Supply model), this increase in productive capacity would be best represented by option D: The long-run aggregate supply (LRAS) curve shifts rightward. This shift illustrates that at every price level, the economy can now produce a greater quantity of real GDP because of productivity improvements or an increase in the factors of production such as technology or capital. Such a shift signals potential for economic growth, and it typically results in lower unemployment and lower inflation as the economy can produce more without increasing prices significantly.