Question

Suppose firms unexpectedly increase investment. Which of the following will occur as a result of this...

Suppose firms unexpectedly increase investment. Which of the following will occur as a result of this unexpected increase in investment?

1 An increase in stock prices

2 A reduction in stock prices

3 No change in stock prices

4 An ambiguous effect on stock prices

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Answer #1

In a closed economy the aggregate of demand is the sum plus of consumption expenditure and investment expenditure so the AD is C+I. Now let the case that the investment expenditure has been increased in the economy this would lead to a situation where the aggregate demand is more than the aggregate supply in the economy. So when the aggregate supply is less than the aggregate demand in the economy which will force the suppliers to increase the aggregate supply in the economy as a result of increase in the aggregate supply in the economy which which will increase the aggregate stock prices in the economy ,so so and increase in the aggregate demand over the aggregate supply will lead to increase in the stock prices in the economy.Hence the a part is correct.

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