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Question
Production in an economy is below its potential due to unemployment. Government starts employment generation schemes. Explain its effect using production possibilities curve.
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Solution
When an economy is producing below its potential level because of unemployment, it implies that the economy is not functioning on the PPC but below the PPC, i.e. Point P as shown in the below diagram. Given the resources and technology, along with the initiation of government schemes, the employment level will increase. Therefore, Point P will shift nearer to PPC.
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