(2) Assume that the Country of Fischerland produces only consumer goods and capital goods.
(a) The graph above shows the PPC for Fischerland. The production of which of the following exhibits increasing opportunity cost: consumer goods only, capital goods only, both goods, or neither good?
The PPC is a perfect example of showing the concept of scarcity,, and that because of scarcity we must make choices, (to choose is to act) and in the process of choosing one, we simultaneously not choose something else. The opportunity cost is the cost of what we didn't choose or the opportunity foregone.
The bowed out shape of the PPC shows that there is increasing opportunity cost. Consider the difference between a society making Bridges (capital goods) or butter (consumer goods),, if we take the machinery that is used to make bridges and use them to try and make butter it will not be as efficient and therefore costs will increase,, the more butter we choose to make the less efficient the bridge making resources.
The shape of the curve ,, bowed out,, shows increasing opportunity costs,, whereas a straight line PPC would demonstrate that there is opportunity cost but not increasing opportunity cost.
Answer - both goods exhibit increasing opportunity cost.
(b) Redraw the graph above. Show a point that shows fully employed & efficiently used resources on the redrawn graph and label it A.
Any point on the PPC curve is efficient and attainable.
(c) Assume there is a recession in Fischerland. On your graph show a recession, label it C.
Answer - Look Above
C is attainable but inefficient,,, usually C represents unemployment,,, and in a recession we have much unemployment.
(d) Identify a fiscal policy action the government can take to address the recession.
Fiscal policy - Government spending or Taxes
Answer - the government can increase spending or decrease taxes.
(e) Assume that no discretionary policy actions are taken, will short-run aggregate supply curve, increase, decrease, or remain the same in the long run. Explain.
From equilibrium to recession to equilibrium again with a lower PL... SRAS curve will shift right as wages and prices adjust.
Answer - wages and production costs decrease and the SRAS curve shifts right.
This junks easy!!!