A production possibilities curve (PPC) represents the maximum amount of two goods or services produced by manufacturers in an economy.

(a)Draw a correctly labeled PPC for U.S. production of consumer and capital goods.

(b)Policymakers enact an investment tax credit for firms that finance technological research and development. Assuming producers of both consumer and capital goods are affected, illustrate on your PPC the long-term effects of this tax credit.

(c)Using a correctly labeled graph of the long-run aggregate supply curve, show how the natural rate of output would respond to the tax credit in the long run. Explain.

(d)How are the PPC and long-run aggregate supply curve similar?