Suppose the economy is in long-run equilibrium and there is an increase in investment As a result, real GDP will in the short run, and in the long run Select one C a

Economics Dec 29, 2020

Suppose the economy is in long-run equilibrium and there is an increase in investment As a result, real GDP will in the short run, and in the long run
Select one C a. decrease; decrease further 2. b. decrease; increase to its initial level . c. increase; decrease to its initial value d. increase; increase further

Expert Solution

As we know, Investment is a part of Aggregate Demand (AD). Thus, rise in investment will lead to rise in AD and AD will shift right. This will increase real GDP. In the long run, economy is self adjusting. Hence, the real GDP will be reduced back to initial level. Or we can say that increase in investment increases GDP in short run and in long run this adjust to the initial level because of the no market arbitrage in long run.

So, the correct option is C "increase; decrease to its initial value".

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