Which of the following statements describes the concept of growth capacity in an economy?

• A. A decrease in the capacity of an economy to produce goods and services.
• B. An increase in the economy's capacity to produce goods and services, measured in nominal or real terms.
• C. The ratio of exports to imports.
• D. The rate at which money supply grows.

Answer: (B)

Growth capacity is the economy’s long-run ability to produce goods and services—its potential output—set by the available capital, technology, and labor. When these inputs improve, the economy can sustain higher production over time. The statement that best describes this concept says there is an increase in the economy’s capacity to produce goods and services, measured in real terms (volume of production) or nominal terms (which includes price changes). This captures the idea that capacity growth is about how much can be produced, not the current level of production or the price level.

A decrease in capacity would be the opposite of growth capacity. The ratio of exports to imports reflects trade, not the economy’s productive potential. The rate at which money supply grows affects monetary conditions, not the economy’s inherent ability to produce goods and services.