Question

Explain why these misconceptions are not true:

• Most economies function on their Production possibilities curve.

• Savings lowers economic activity.

• Government budget debt and deficit mean the same thing.

• Decisions made in Washington D.C. have little impact on the economy.

• Government spending stimulates demand but will not affect inflation.

• The government can never shut down.

Answer 1

Production possibility curve shows various combinations of two goods that an economy can produce with the scarce and limited resources.

The major assumption of PPF is that resources are not specific that’s they can be shifted from the production of one good to the other. In real world economies, this may not hold true. Another important assumption on which PPF is based is that resources are fully employed that’s resources are not lying idle. However, from the concepts of Macroeconomics, we know that there prevails a natural rate of unemployment in any economy and any attempt to reduce unemployment below that natural level leads to higher inflation in the economy. Thus, real world economies lie inside the ppc curve showing inefficient production of goods.

Higher saving leads to lower economic activity is a misconception.

From the national income accounting, we know that savings equal investment. Higher savings leads to higher investments which in turn leads to higher economic activities.