How does an increase in investment affect the economy?

Define what investment is: spending by firms on capital goods (eg. machinery). Then analyse the effect of the change in the question: Investment is component of the equation Y=C+I+G+NXIncreasing investment therefore increases income (Y). This leads to a shift in the AD-AS diagram of the AD curve to the right. This may lead to increase in inflation. It is important to evaluate your answer: If you are using the Keynesian AD-AS model, the change in GDP and price level due to the shift in AD will depend on the amount of spare capacity in the economy. Also, the size of the shift in AD will depend on the the size of the increase in investment and the size of the income multiplier (1/1-MPC).

EC
Answered by Ellie C. Economics tutor

2244 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain the 'Economic Problem' and how this closely links to the principles of demand and supply and how this ultimately determines the price of goods.


Evaluate the view that mergers always result in a lessening of competition


Could you explain the distribution of the incidence of a tax and why it may fall differently on consumers and producers?


Using the extract explain the effect of the corona virus on the UK economy in 2020 (10 marks)


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences