# ch2answers - CHAPTER 2 THE U.S. ECONOMY PROBLEMS 1. Draw a

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THE U.S. ECONOMY PROBLEMS 1. Draw a production-possibilities curve with consumer goods on one axis and  investment goods on the other axis. a. Identify the opportunity cost of increased investment. b. What will happen to future production possibilities if investment  increases?  Illustrate. c. What will happen to future production possibilities if only  consumer goods are produced? (a) The opportunity cost of increased investment is a decrease in production of  consumer goods. For example the movement from point D to point E. Consumer Goods Investment Goods .  D .  E Part ‘b’ shift Part ‘c’ shift CHAPTER 2

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(b) If investments increase the production-possibilities curve will shift outward.  This occurs because the capital stock, a factor of production, increases with  increases in investment. (c) If only consumer goods are produced, the capital stock will begin to decline as  factories and equipment wear out.  As a result, the production-possibilities  curve will shift in toward the origin. 2. Suppose the following data describe output in two different years Item Year 1 Year 2 Apples Computers Video Rentals 20,000 @ \$0.25 each 700 @ \$800 each 6,000@ \$1.50 each 30,000 @ \$0.30 each 650 @ \$900 each 7,000 @ \$2.00 each a. Compute nominal GDP in each year. b. By what percentage did nominal GDP increase between Year 1 and Year  2? c. Now compute  real  GDP in Year 2 by using the prices of Year 1. d.
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## This note was uploaded on 04/18/2008 for the course ECON 201 taught by Professor Bertaux during the Spring '08 term at Xavier.

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ch2answers - CHAPTER 2 THE U.S. ECONOMY PROBLEMS 1. Draw a

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