Modelling The Economy: PPC And CFI

Question 1

Production possibility curve (PPC)

Answer 1

diagrammatic representation of the maximum combination of two products that an economy can produce when all its resources are used efficiently per time period

Question 2

Point inside PPC

Answer 2

Resources not being used efficiently

Question 3

Beyond PPC

Answer 3

Level of production not currently attainable with available resources and technology

Question 4

Position on the curve

Answer 4

Represents maximum productive efficiency, zero wastage and full resource employment

Question 5

Movement along PPC

Answer 5

Represents an opportunity cost, in order to produce more of good x, we must produce less of good y

Question 6

Assumptions of the PPC

Answer 6

1) fixed production possibilities
2) scarcity
3) constant state of technology
4) efficiency

Question 7

Marginal rate of transformation

Answer 7

Number of units or amount of a good that must be foregone to create or attain one unit of another good.

Shown by gradient of PPC

Question 8

PPC = straight line

Answer 8

The marginal rate of transformation is the same, and the opportunity cost is constant

Question 9

PPC concave outward

Answer 9

Shows that there is an increasing opportunity cost the more units of a product you produce

Question 10

Features illustrated by the PPC

Answer 10

1) scarcity
2) opportunity cost
3) choice
4) resource unemployment
5) efficiency
6) actual growth and growth of productive capacity

Question 11

Actual growth

Answer 11

Shifting of the PPC, related to an increase in quantity or quality of resources + technology

Question 12

Circular flow of income model

Answer 12

Illustrates how economic activity and national income are determined based on interactions of economic decision makers

Question 13

Income

Answer 13

Sum of the returns of all factors of production

Question 14

Economic decision makers

Answer 14

• government
• firms
• households

Question 15

Leakages

Answer 15

• taxes
• savings
• imports

Question 16

Injections

Answer 16

• government spending
• investment
• exports

Question 17

Closed economy

Answer 17

Part of the CFI Mindel, household supply factors of production to domestic firms who supply goods and services. In turn, firms provide factor income s to households, which is spent on goods and services creating revenue. In a closed economy, income flow us numerically equal to expenditure and output - there are no foreign imports or exports.

Question 18

Open economy

Answer 18

• Domestic and foreign decision makers are involved
• the foreign sector facilitates international trade
• not all income spent on domestic good and services
• additional money can enter economy as government spending, export earning and investment expenditure

Question 19

National income equilibrium formula

Answer 19

Savings + taxation + import expenditure = government spending + investment expenditure + export earnings

(S + T + M = G + X + I)

Question 20

Assumptions of the CFI

Answer 20

• simple economy = no government sector + households spend all income with no savings or investments
• closed economy = no imports/exports