Understanding the World through Economic Models

Which diagram best fits the following change: A discovery of new oil reserves

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Answer explanation

Having a new source for a resource ("oil reserves") expands an economy's overall possible production possibility (i.e. an increase in potential output)

Which diagram best fits the following change: firms hire more workers

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Answer explanation

The firm is making use of existing resources (in this case labour) so there is movement closer to the curve, but it doesn't shift the curve outward because our potential output hasn't changed. Just our actual output.

Which diagram best fits the following change: a vaccine for contagious diseases is invented

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Answer explanation

This focuses on improving the health and well-being of an economy's labor force, which is an improvement in the quality of a factor of production. This could cause an increase in potential output.

Which diagram best fits the following change: the widespread use of new technology

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Answer explanation

Technological improvements tend to increase production possibilities, which may increase potential output.

Which diagram best fits the following change: a violent conflict destroys a portion of a country's factories, machine, and road systems

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Answer explanation

This destruction of factors of production reduces an economy's overall capability of producing, which lowers the potential output.

Which diagram best fits the following change: large cuts in government spending on education and healthcare lowers level of health and education in a population

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Answer explanation

This strange government act would reduce the quality of your labor force, which reduces your potential output in the future.

Which diagram best fits the following change: an increase in the quantity of capital goods

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Answer explanation

This one is pretty straightforward. When you have more capital goods, you increase your potential growth. Although, some firms might benefit from more capital goods than others.

Which diagram best fits the following change: an improvement in the level of education and skills of workers

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Answer explanation

As before, when you invest in human capital, you improve the quality of labor as a factor of production.

Which diagram best fits the following change: industrial pollution destroys the environment

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Answer explanation

The destruction of factors of production reduces potential growth in an economy.

Which diagram best fits the following change: an increase in the quantity of capital goods

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Answer explanation

An increase in the quantity of a factor of production (in this case, physical capital) will increase potential output.