Question

5. Assume you are looking at an AD/AS graph showing LR equilibrium, explain what happens to AD and AS in the short run and LRAS in the long run when investment increases.

6. Assume you are looking at a production possibility curve with capital goods on the vertical axis and consumer goods on the horizontal axis, explain what happens on the production possibilities curve when investment increases.

Answer 1

a) Starting from the long run equilibirum when the investment in the market increses the AD curve will shift to the right and the new equilibrium in the market will be at a higher price and higher output, in the long run, the SRAS will adjust to the current price and that will shift the SRAS to the left, new equilibrium will be at a higher price and same level of output.

b) WHen the investment increase in the market the PPF will shift upward at the vertical portion as that represents a higher level of capital investment in the market.