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Investment and Long-Run Aggregate Supply in the Great Recession Between the second quarter of 2006 and...


Investment and Long-Run Aggregate Supply in the Great Recession

Between the second quarter of 2006 and the second quarter of 2009, real gross private domestic investment fell in all quarters except the second quarter of 2007 at an average annual rate of 11.5 percent. During that time period, depreciation exceeded real Gross Private Domestic Investment (GDPI).

What effect did having depreciation exceeding GDPI have on U.S. long-run aggregate supply curve?

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Answer #1

Depreciation is the loss of capital due to wear and tear and old age. When depreciation exceeds GDPI, it means that net domestic private investment is negative. Negative NDPI implies that more of capital is getting lost due to depreciation than what gets added due to investment. This means that the stock of capital stock falls due to negative NDPI. A decrease in capital stock decreases the potential level of output a nation can produce. This implies a decrease in long run aggregate supply. Graphically, the LRAS would shift to the left.

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