Operates under 4 assumptions these assumptions are

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Operates under 4 assumptions – these assumptions are necessary for economist to illustrate the opportunity cost of producing one product over the another o The economy is fully efficient meaning that it is operating at full production and full employment o Resources are fixed o Technology is fixed o There are only two productions Any point on the production possibilities curve represents a maximum output of two products that is both attainable and efficient The type and quantity of goods produced is based on what society values at the time A point lying OUTSIDE the production possibility curve represents a production level that is UNATTAINABLE (W) Given that two options of the assumptions of Production Possibilities Curve are that resources and technology are fixed, it is impossible to produce any combination of product that lies beyond the boundary of the curve Computers (per thousand) 9 A 8 7 B W 6 5 C 4 3 V D 2 1 E 1 2 3 4 Hamburgers (per hundred thousand) A point lying INSIDE the production possibility curve represents a level of production that is attainable but inefficient. (V) Society could produce 2 hundred thousand hamburgers and 3 thousand computers. (V), this is not an efficient use of resources and thus is not a desirable level output
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9 8 7 Growth 6 5 4 3 De cli ne 2 1 1 2 3 4 If we drop the assumption of fixed resources and fixed technology, then the production possibilities curve can shift. A shift to the right represents economic growth o Any point alone the growth curve is superior to the original curve, implies greater output, more resources found, or improved technology or both A shift to the left indicated economic decline o Output of one or both of the products has declined Consumer Goods – goods and services that satisfy wants directly Cars, clothes, furniture, etc satisfy our needs immediately Are expendable and get used up Money Demand Curve – represents the relationship between the quantity of money demanded and the nominal interest rate Money demand curve slopes downward because the nominal interest rate raises the opportunity cost of holding money Federal Funds Rate – the discounted interest rate that the branch banks of the Fed charge each other for short- term loans Discount Window - allows eligible banks to borrow money from the central banks to meet demand during money shortages Banks normally only utilize this during emergencies or cash shortages Primary Credit Rate – the rate the Federal Reserve charges commercial banks for discount window lending Usually set one percent above the federal funds rate Reserve Requirements – amount of reserve set by the Fed, is the percentage of total deposits that must be held in order to repay depositors Federal Reserve can control the money supply by altering the reserve requirements it places on banks Bank reserves are not counted in the nation’s money supply Central Bank Independence – releasing bankers from short-term economic conditions Gives banks freedom to focus long-term solutions to economic problems
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