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Which of the following will occur when the capital stock increases? 1 Investment will increase 2...

Which of the following will occur when the capital stock increases?

1 Investment will increase

2 Investment will decrease

3 There will be no change in investment

4 There will be an ambiguous effect on investment

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Answer #1

when the capital stock increases :

Answer : 1 Investment will increase

Explanation for the answer :

Investment adds to the nation’s capital stock. An increase in capital shifts the aggregate production function outward, increases the demand for labor, and shifts the long-run aggregate supply curve to the right. Investment therefore affects the economy’s potential output and thus its standard of living in the long run.

If the capital stock rises, the real interest rate falls.People start saving more (a rightward shift of the saving curve). Then investment must increase. And if investment increases, the capital stock rises.

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