Question

Before the Covid crisis, economists considered that the US economy was at “full employment.” Assuming that the crisis did not affect the US economy’s total capacity to produce, the current situation would be best represented by: A) the PPF shifting inward (closer to the origin) B) the PPF shifting outward (further from the origin) C) a point on the PPF located on the opposite side of the pre-Covid point D) a point outside the PPF E) a point inside the PPF

Answer 1

Correct option is C

• PPF curve represents the optimal combinations of two commodities which can be produced efficiently in the economy.
• If there is an economic improvement, PPF curve shifts outwards.
• If there is destruction in the economy, PPF curve shift inwards.
• Since here we are assuming that crisis made no change in U.S. economy's total capacity to produce, we can infer that PPF curve will remain same and it would not shift anywhere.
• So, the optimal point would lie on the same PPF curve boundary whether opposite of the pre-covid point or the same pre-covid point.