Labor Supply Expansion Drives Growth

Steps:

• Identify economic growth as increase in real GDP from factors like labor, capital, and productivity.
• Evaluate each option's impact on these factors.
• Focus on policies boosting productive inputs without contractionary effects.
• Select option enhancing labor utilization for direct growth stimulus.

Why B is correct:

• Increasing maximum hours of work expands labor supply, raising total hours worked and thus aggregate output per the production function Y = F(K, L), where L is labor input.

Why the others are wrong:

• A: Increasing interest rates raises borrowing costs, reducing investment and consumption, which slows growth.
• C: Reducing spending on education lowers human capital formation, decreasing long-term productivity and growth potential.
• D: Reducing spending on infrastructure diminishes physical capital stock, impairing efficiency and economic expansion.

Final answer: B