An economy’s PPF for consumption vs. capital goods is F0. During a recovery it moves from point A (inside F0) to point B (on F0) as unemployment falls. Five years later, technology and labor force improvements shift the frontier outward to F1, and the economy operates at C (on F1). Which statement is correct?

Question

An economy’s PPF for consumption vs. capital goods is F0​. During a recovery it moves from point A (inside F0) to point B (on F0) as unemployment falls. Five years later, technology and labor force improvements shift the frontier outward to F1​, and the economy operates at C (on F1​). Which statement is correct?

BlackTom AI · Accepted Answer

To evaluate the question, we must interpret movements along the PPF for consumption vs. capital goods.
Option A→B describes movement from A (inside the current PPF F0) to B (on F0) as unemployment falls. This is a short-run improvement where the economy moves from interior to the frontier, increasing output and employment without yet changing the capacity. The subsequent shift outward to F1, moving from F0 to F1, represents a persistent increase in the economy’s capacity due to technology and labor-force improvements, i.e., long-run growth. So, A→B is a short-run expansion (moving to the frontier), and F0→F1 is long-run growth (outward shift in the frontier).

Option 1: Both changes are long-run growth. This would be true only if both shifts were outward or only represent sustainable capacity increases. A move from inside to on the frontier is typically a short-run expansion as resources are being fully utilized, not a permanent capacity increase. So this overstates the nature of A→B.

Option 2: A→B is long-run growth; F0→F1 is short-run expansion. The move from interior to the frontier is not long-run growth because it does not increase the economy’s capacity; it’s just a recovery in the current period. The outward shift F0→F1, however, does increase capacity and is the classic long-run growth mechanism. This option mislabels A→B as long-run growth and F0→F1 as short-run expansion.

Option 3: A→B is short-run expansion; F0→F1 is long-run growth. This matches the standard interpretation: A→B is a movement from inside the PPF to the frontier as unemployment falls and output rises in the short run, while F0→F1 reflects an outward shift in the frontier due to improved technology and potential, i.e., long-run growth.

Option 4: Both changes are short-run expansions. A movement to the frontier is short-run, but the outward shift F0→F1 is not a short-run expansion; it changes the economy’s productive capacity and is associated with long-run growth rather than a temporary, short-run increase.

In summary, each option frames the nature of the two phases differently, but the only pairing that aligns with standard macroeconomic interpretation—A→B as a short-run expansion and F0→F1 as long-run growth—is the option that states A→B is short-run expansion and F0→F1 is long-run growth.

ECON 2002.01 AU2025 (21333) Midterm Exam 2- Requires Respondus LockDown Browser

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