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Investment and Long-Run Supply
medium

Which of the following statements accurately describe the impact of investment spending on long-run aggregate supply (LRAS)? Select all that apply.

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Choose the Best Answer

A

Increased investment leads to enhanced productivity, which shifts LRAS to the right.

B

Higher investment spending can cause inflation in the long run, without affecting LRAS.

C

Investment in technology and equipment contributes to capital formation, increasing the capital stock.

D

Reducing investment spending can lead to a leftward shift in the LRAS due to decreased productivity.

E

Investment primarily affects short-run aggregate supply, with minimal impact on long-run supply.

Understanding the Answer

Let's break down why this is correct

Answer

Investment spending plays a crucial role in shaping long-run aggregate supply (LRAS) because it increases the economy's productive capacity. When businesses invest in new machinery, technology, or facilities, they become more efficient and can produce more goods and services over time. This increase in production capacity leads to a rightward shift in the LRAS curve, indicating growth in the economy. For example, if a factory invests in a new production line, it can create more products with the same amount of labor, boosting overall output. Thus, higher investment spending generally results in a stronger and more productive economy in the long run.

Detailed Explanation

Other options are incorrect because This suggests that investment directly shifts LRAS; This option implies that investment causes inflation without affecting LRAS.

Key Concepts

Investment and Long-Run Aggregate Supply
Capital Formation
Economic Growth
Topic

Investment and Long-Run Supply

Difficulty

medium level question

Cognitive Level

understand

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