Suppose an LDC is producing on its production possibilities frontier such that it produces a subsistence level of consumption goods and enough capital goods just to replace the existing capital that depreciates. Foreign investment can lead to economic growth for this LDC in which of the following ways?
A) The LDC uses the investment to control inflation.
B) The mere presence of more money in the economy will lead to economic growth.
C) The LDC invests in consumption goods to move beyond the subsistence level this year.
D) The LDC invests in additional capital such that the rate of capital formation exceeds the value of capital depreciated.

Question

Quizplus · Accepted Answer

Foreign investment can lead to economic growth for an LDC if it is used to invest in additional capital such that the rate of capital formation exceeds the value of capital depreciated. This is because investing in additional capital can lead to an increase in the production possibilities frontier, allowing the LDC to produce more goods and services, including more consumption goods. The other options (A, B, and C) are not likely to lead to sustained economic growth. Controlling inflation may be important for stable economic growth, but it will not directly lead to expansion of the production possibilities frontier. Mere presence of more money in the economy often leads to inflation and not necessarily growth. Investing in consumption goods may lead to an immediate increase in well-being, but it will not lead to sustained economic growth.

Suppose an LDC Is Producing on Its Production Possibilities Frontier