1. Could a nations production possibilities curve ever shift inward? Explain what such a shift would mean, and discuss events that might cause such a shift to occur.
2. Suppose blue-eyed people were banned from working. How would this affect a nations production possibilities curve?
3. Evaluate this statement: The U.S. economy could achieve greater growth by devoting fewer resources to consumption and more to investment; it follows that such a shift would be desirable.
1. Yes, a nation’s production possibility curve can shift inward if there is a drastic fall in a nation’s resources. For example- an earthquake can affect a nation’s physical infrastructure due to which its productivity falls. 2. The nation’s PPC will shift inward since the nation’s productive humanresources are not put to use. Another way to understand it is that such a move will reduce the labor stock in the economy and lead to an increase in wages. A higher cost of labor means that less labor will employed per unit of capital. 3. Lets assume a two sector model where Y…
= C + Si.e. income is either consumed or saved. The savings are then channelized through a financial sector for investment purpose (or, Y = C + I). Now, if the US economy devotes fewer resources to consumption, it implies that there will be greater savings. If there is investment demand then these savings can result in greater economic growth by increasing the productive capacity of the economy.