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Chapter 11: Q.52 (page 293)

If foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model.

Short Answer

Expert verified

Increase in investment will lead to increase in Aggregate demand.

Step by step solution

01

Aggregate demand : 

The entire quantity of products and services sought by customers at a particular price level and period is known as aggregate demand.

02

Investment increase in United States impact : 

As foreign wealth holders are pleased about the United States' future prospects, it suggests they are confidence in the economy's health. People will put their money into the United States. As a result, AD will rise as a result of investment. Increased investment will result in a rise in AD.

In the figure above, the AD curve has shifted rightward from AD to AD1, resulting in an increase in Real National Output and a price level increase from P to P1. Increased employment follows an increase in the AD curve. The economy has approached its potential GDP.

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Most popular questions from this chapter

Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was the only development in the labor market that year, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity?

If the economy is operating in the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?

What are the components of the aggregate demand (AD) curve?

The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?

Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?
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