Suppose that an economy is initially operating at a point on its PPC. If it then experiences an expansion in its production capacity, but its total spending does not rise as fast as its capacity, the economy will end up:

Question

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When an economy experiences an expansion in its production capacity but its total spending does not rise as fast as its capacity, it will end up inside its PPC. This is because the expansion of production capacity means that more goods and services can be produced, but the lack of increased spending means that there is not enough demand for all those goods and services. As a result, some of the resources in the economy will remain idle and the economy will operate below its potential, which is represented by the PPC. This situation is known as a recessionary gap.

Suppose That an Economy Is Initially Operating at a Point