Question

1. Explain the relationship between investment and long-term economic growth and describe the relationship graphically in an AD/AS graph.

**Please post original answer and include graph*****

THANKS!!

Answer 1

Investment has two effects on economy. First, it leads to rise in demand in economy. it is important component of aggregate demand. Second, if economy has extra capacity or operating below the full employment, then investment would scale up the extra capacity of economy. Now supply curve will shift to right signifying higher level of GDP. But if economy is already operating at full employment, Rise in aggregate demand in form of increased investment would cause only rise in inflation.

Following is aggregate demand:

In above diagram, the rise in in investment initially shifts the Aggregate demand (AD) to AD2 from AD1. Further, over the long run, Rise in investment will increase Long run aggregate supply to LRAS2.