Consider an Economy That Has Experienced a Sharp Drop in Investment

Consider an economy that has experienced a sharp drop in investment expenditure in both the industrial and residential housing sectors. Suppose the government has committed fiscal policy to a debt ratio target and will not provide fiscal stimulus, and the central bank is content to have inflation rates lower than its target rate. The central bank does not react to the effects of the fall in investment. Explain the effects of the fall in investment on equilibrium output, employment and inflation. In the absence of policy action or an offsetting demand shock, is there an adjustment process within the economy that will move it back to equilibrium at potential output? Explain that process and illustrate with diagrams for the Phillips curve and AD/AS/Y_P.