Problem Set 2 Econ 214

Answer No. 1 Production possibility curve is a particular form of curve, which shows the possibility of production in a particular economy (Gwartney, Stroup, Sobel, Macpherson p.28). In an economy, the resources are scarce, therefore, it is important for the economy to make sure that, it keeps a balance between the productions and utilizes its resources appropriately. If the production possibility curve of an economy will move outwards then, the long run supply curve will have a positive change to the right. There will be an increase in supply of products as resources. If the computer technology will improve then, the supply of products produced by use of computer technology will also increase to a certain level. This will move the supply curve to the left.
Answer No. 2
Full Employment:

AD
2
1
100
180

AD
2
1
100
180

Economic boom :
:1

AD1
2
1
80
200
AD2
140

AD1
2
1
80
200
AD2
140

Recession:

P
Y
AD1
2
1
80
200
AD2
140
P
Y
AD1
2
1
80
200
AD2
140

Short Run and Long Run Aggregate Supply Curves
Full Employment

YP=140
P

2

1
LRAS

YP=140
P

2

1
LRAS

Economic boom

2

1
AS
YP=140

2

1
AS
YP=140

Recession:

P
Y
1

SRAS1

P
Y
1

SRAS1
YP = 140
SRAS2

LRAS1

200

Answer No. 3 The budget deficit is the excess of expenditure incurred by an economy over the incomes generated by it (Gwartney, Stroup, Sobel, Macpherson p.221). In order to ensure that the budget deficit is financed, the government has to ensure it has extra funds available with it. The government, also works out the methods in which, it asks for loans to other countries around the world. By borrowing from other countries and loaning out money to other countries, this now becomes part of our national debt and surplus (Gwartney, Stroup, Sobel, Macpherson p.221). However, Budget deficits do increase aggregated demand as the government has increased in the supply of money to a certain

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