Question

Suppose that an economy is initially operating at a point on its PPC. If it then experiences an expansion in its production capacity, but its total spending does not rise as fast as its capacity, the economy will end up:_________
A. Still on its PPC
B. Outside its PPC
C. Inside its PPC
D. On one of the axes of its PPC

Answer 1

Answer:

C. Inside its PPC

Explanation:

The Production possibility Curve also known as Production Possibility Frontier PPF is the curve that depict the relationship in the production of 2 given goods in an economy (See Image).  

The curve basically shows 5 situations:

1. Point A: where all the production is devoted to Wheat

2. Point B: where all the production is devoted to Cotton

3. Points C: Any given point along the curve different to point A and B represent the trade off in the production of the 2 goods

4. Point D: Is an impossible point to achieve as it is outside the capabilities of the curve

5. Point E: Is an inefficient point of production as it is below the possibilities of production.

In the case of the expantion of the production capacity while the total spending fails to rise as fast. Then, the economy ends up in point E were inefficiency must be solve in order to produce in a maximum capacity.