The main effect of an increase in the capital stock is a(n)
A)rightward shift of the long-run aggregate supply curve
B)rightward shift of the aggregate demand curve
C)leftward shift of the long-run aggregate supply curve
D)leftward shift of the aggregate demand curve
E)increase in price and output levels

Question

Quizplus · Accepted Answer

An increase in capital stock leads to an increase in potential output, which causes a rightward shift of the long-run aggregate supply curve. This means that the economy can produce more output at the same price level, resulting in an increase in real GDP and a decrease in the price level. There is no direct effect on the aggregate demand curve, as this curve represents the total spending in the economy, while the capital stock affects the economy's production capacity. Therefore, options B, C, D, and E are incorrect.

The Main Effect of an Increase in the Capital Stock