21.Use the diagram below to answer the questions.
(a)If the economy’s production possibilities curve is shown by curve AB, then draw in a new curve CD which indicates positive economic growth.
(b)What are some of the factors which could cause a shift from AB to a new curve EF?
(c)If the economy illustrated by production possibilities curve AB is producing at point 4, what economic problem does this represent for this economy?
Increases in aggregate demand may be necessary to cure this unemployment problem.
22.How would the Great Recession of 2007–2009 be pictured in a typical production possibilities curve?
The Correct Answer and Explanation is :
21.
(a) If the economy’s production possibilities curve is shown by curve AB, a shift to a new curve CD indicating positive economic growth can be shown by drawing curve CD to the right of AB. This shift signifies an increase in the economy’s productive capacity, allowing the economy to produce more goods and services. The rightward shift reflects an expansion in resources or technological advancements that lead to an increase in the total output possible in the economy.
(b) Several factors can cause a shift from curve AB to a new curve EF, which would indicate a shift outward in the production possibilities curve. These factors include:
- Technological advancements: New technologies can lead to more efficient production methods, increasing output without using more resources.
- Increased labor force: A larger workforce, through population growth or immigration, can increase the capacity for production.
- Capital accumulation: Investments in capital goods, such as machinery and infrastructure, can enhance productivity.
- Better education and training: A more skilled labor force can increase the productivity of workers, leading to greater output.
- Natural resource discovery or improved utilization: Finding new resources or using existing ones more effectively can expand production possibilities.
(c) If the economy illustrated by production possibilities curve AB is producing at point 4, and assuming point 4 lies inside the curve, this suggests that the economy is not utilizing its resources efficiently. The economic problem represented by this is underemployment of resources, which can be due to factors like unemployment or underutilization of capital. The economy is not producing as much as it is capable of, meaning there is slack in the system. This situation often arises in periods of recession, where businesses cut back on production, leading to unemployment and underused resources.
Increases in aggregate demand (through fiscal policy, like government spending or lower taxes, or monetary policy, like reducing interest rates) could help stimulate economic activity and reduce unemployment, leading the economy to move closer to its production possibilities frontier.
22. The Great Recession of 2007–2009 and the Production Possibilities Curve:
During the Great Recession, the economy experienced a severe contraction, which would be represented on a production possibilities curve (PPC) as a movement from the curve inward. In a typical PPC diagram, the curve shows the maximum possible output combinations of two goods or services that the economy can produce given the resources and technology available.
The Great Recession led to a significant reduction in output as economic activity slowed. This contraction could be shown as a shift from a point on or near the curve to a point inside it. This indicates underutilization of resources, as there was a sharp decline in production due to a combination of factors, including reduced consumer demand, lower business investments, and significant financial market turmoil. Many businesses closed or scaled back production, leading to widespread job losses and decreased income levels. Unemployment soared, and many firms reduced their capital investments.
This inward shift in the PPC indicates that the economy was not producing at its potential output due to the recessionary conditions. The resources (labor, capital, etc.) were not being fully employed, and the economy was operating below its productive capacity. It reflects the impact of the financial crisis on the economy’s ability to produce goods and services.
Over time, as the economy recovered, the PPC could shift back outward as aggregate demand increases, unemployment falls, and businesses begin to invest again, returning to more optimal levels of production. However, the period of recovery took several years, illustrating how severe recessions can have long-lasting impacts on the economy’s productive capacity.