Essentials of Economics 7th Edition by Gregory Mankiw

Exercise 13

Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.
a. Draw an aggregate-demand/aggregate-supply diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and real output. Explain in words why the aggregate quantity of output supplied changes.
b. Now use the diagram from part (a) to show the new long-run equilibrium of the economy. (For now, assume there is no change in the long-run aggregate-supply curve.) Explain in words why the aggregate quantity of output demanded changes between the short run and the long run.
c. How might the investment boom affect the long-run aggregate-supply curve? Explain.