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    How a Disaster Affects the Production Possibilities Frontier

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    Please help with the following problem.

    How does the existence of money reduce the costs of making transactions, relative to a society based entirely on barter? English is becoming the usual language for international transactions, even if the language of neither country is English. How does this reduce the cost of transacting?

    There are two goods in the economy, anchovies (a fish) and bananas (a farm product). Draw the economy's production possibilities before and after natural disaster that lowers the banana harvest but does not affect anchovies.

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    Solution Preview

    1. Money reduces the cost of transactions by speeding them up: buyers and sellers do not need to waste time negotiating the value of one good in terms of another. Similarly, using English as the ...

    Solution Summary

    The first solution explains why money and a common language reduce the cost of making transactions.
    The second solution illustrates how a country's Production Possibilities Frontier (PPF) is affected by a disaster that reduces the harvest of one good but does not affect the other.