In 2007, investment in France increased by 7 billion euros. Which of following occurs?
i. an upward shift in the AE curve.
ii. a leftward shift in the AD curve.
iii. an increase in the price level and real GDP in the short run.
iv. an increase in the price level and no change in real GDP in the long run.

Question

Quizplus · Accepted Answer

An increase in investment will cause an upward shift in the AE curve (i) and an increase in real GDP and price level in the short run (iii). However, in the long run, the increase in price level will lead to a decrease in aggregate demand due to the wealth effect and potentially an increase in interest rates, leading to no change in real GDP but an increase in the price level (iv). There is no reason to believe there would be a leftward shift in the AD curve (ii).

In 2007, Investment in France Increased by 7 Billion Euros