Chapter 38, Problem 7MCQ

To determine

The correct option for the reason why aggregate production function shows real GDP.

Answer to Problem 7MCQ

From the available options, the correct option is increasing at decreasing rate.

Explanation of Solution

An economic principle known as the law of diminishing returns states that as an investment in a certain area increases, the rate of profit from that investment can no longer increase at a certain point assuming other variables remain constant. Therefore, physical capital explains why the aggregate production function shows real GDP is increasing at decreasing rate because the economy depends on available inputs and it cannot decrease. It means it cannot increase at an increasing rate because the determinants of production are unchanged. Moreover, it cannot diminish at a constant rate because of the business cycle of the economy.

Therefore, the correct option is a (increasing at a decreasing rate) and all other options are incorrect.

Economics Concept Introduction

Introduction: The aggregate production function explains how an economy's real total gross domestic product (real GDP) is influenced by the inputs that are available in the economy such as physical capital.