Use the following to answer questions .
Exhibit: Economic Growth, AD and AS Analysis
-(Exhibit: Economic Growth, AD and AS Analysis) Assume that the economy is initially in long-run equilibrium. What happens if investment spending increases?

Question

Use the following to answer questions .
Exhibit: Economic Growth, AD and AS Analysis 
-(Exhibit: Economic Growth, AD and AS Analysis) Assume that the economy is initially in long-run equilibrium. What happens if investment spending increases?

Quizplus · Accepted Answer

An increase in investment spending shifts the aggregate demand curve to the right, causing an increase in both output and the price level in the short run. However, in the long run, the increase in investment will lead to an increase in capital stock, which will shift the long-run aggregate supply curve to the right, thus increasing output but decreasing the price level back to its original level.

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