Question

Which of the following statements about an outward shift of the production possibilities frontier is true?

a. The economy can no longer produce the same quantities of consumption and capital goods it did before the shift.
b. The economy can produce more capital goods but fewer consumption goods.
c. The economy faces a broader set of optimal production combinations.
d. The aggregate supply curve shifts upward, meaning that at every price, producers are willing to supply less than they were before the shift.

Answer 1

C. The economy faces a broader set of optimal production combinations.

Step-by-step explanation:

An outward shift in production possibilities frontier implies growth in the economy.

This can happen due to-

(1) Improved Technology can enable production in greater quantities at less cost.

(2) Increase in employment enables the needs and wants of the people to get satisfied more and increases consumption also.

(3) Increase in skills of the labour force which can be a boon for greater output being produced.

(4) Increase in net exports which brings foreign inflows into the economy which boosts the GDP.

(5) Increase in profits of the businesses.

(6) Increase in credit availability for different sectors of the economy.

Hence, if there is an outward shift in Production Possibilities Frontier (PPF), we can say that the economy faces a broader set of optimal (suitable) production combinations, which enables it to grow.