Fiscal Policy and Production Possibilities Frontier
Suppose a country’s government increases spending without raising taxes, which causes the real interest rate to rise from 3% to 5%. Which of the following describes the most likely long-run effect on the country’s production possibilities frontier (PPF)?
A
The PPF will shift inward only in capital-intensive sectors
B
The PPF will remain unchanged but with different production points
C
The PPF will shift outward more rapidly due to multiplier effects
D
The PPF will shift outward less than it would have otherwise
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