Question Set on Macroeconomic Analysis

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Introduction to Macroeconomic Analysis
Princeton University

(a) Explain the meaning of a production possibilities curve. (b) What is assumed to be constant when we draw that curve?
(c) How is a point on the curve different from (1) a point inside the curve or (2) a point outside the curve? (d) How does this curve illustrate the concept of opportunity cost? (e) How does it illustrate the principle of increasing marginal opportunity cost?

1(a)Production possibility curve measures the maximum combination of outputs in totality of the exerted inputs. It explains the idea that nothing is entirely free, and if so, there will be hidden costs or a limit to how much you can achieve. It helps us understand how countries and individuals achieve production by expounding the concept of specialization/trade. (b) Opportunity cost of trade concept. (trading points on one subject for higher points on another). (c) Points inside the curve mean that the economy is not fully utilizing its resources and according to the given set of inputs, more goods and services can be produced. Points along the curve show efficiency, considering the inputs/technology. Production outside of the curve can’t be produced with the existing resources. (d) It shows whether the item you are talking about is increasing or decreasing by its slope. Some resources are more efficient than another. If the opportunity cost is increasing it will be a bowed out shape. (e) The curve will be bowed out for every added unit of one good that is given up or switched for another use.

2(a) Business, Households, and Government. (b) Colander (2008) states that “households are the most powerful economic institution. They ultimately control government and business, the other two economic institutions” (p. 63). Three large groups of decision makers make up the US economy. They are households, businesses, and government and they interact in a variety of ways. Households buy goods and services from businesses and...
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