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Production Possibilities Curve, Economic System

1.The production possibilities curve is an important model of how much an economy can produce given resources and technology.
a. What characteristic of the economy causes the production possibilities curve to bow outward. Explain.

2. The Circular Flow diagram is model of how the economy works. Explain how the model would change if the following events occurred:
a. Households increase savings.
b. Drastic spending cuts are implemented by the government.

3. looking at types of economic systems, which one closely resembles the US economy. Explain and support your answer.

Solution Preview

Step 1
The characteristic of the economy that causes the production possibilities curve to bow outwards is increase opportunity cost. There is disparity in factor intensities and technologies of two production sectors. As an economy specializes more and more into one product the opportunity cost of producing that product increases. This increase in opportunity cost is causes the PPC to bow outwards.

Step 2
When, households increase savings, their consumption expenditure decreases. The good and services sold to the households decrease. Also the good and ...

Solution Summary

This solution explains important characteristics of the economy.. The sources used are also included in the solution.