What will happen to the long-run aggregate supply (LRAS) curve and the long-run Phillips curve (LRPC) if expansionary policies are used to increase investment spending?Elimination ToolSelect one answerALRAS increases; LRPC does not changeBLRAS increases; LRPC increasesCLRAS increases; LRPC decreasesDLRAS decreases; LRPC increasesELRAS decreases; LRPC does not change
Question
What will happen to the long-run aggregate supply (LRAS) curve and the long-run Phillips curve (LRPC) if expansionary policies are used to increase investment spending?Elimination ToolSelect one answerALRAS increases; LRPC does not changeBLRAS increases; LRPC increasesCLRAS increases; LRPC decreasesDLRAS decreases; LRPC increasesELRAS decreases; LRPC does not change
Solution
The answer is B: LRAS increases; LRPC increases.
Here's why:
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Expansionary policies, such as lowering interest rates or increasing government spending, are designed to stimulate economic activity. If these policies are successful, they will increase investment spending.
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An increase in investment spending means that businesses are spending more on capital goods. This increases the economy's productive capacity, which shifts the long-run aggregate supply (LRAS) curve to the right, or in other words, LRAS increases.
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However, in the long run, expansionary policies can lead to inflation. This is because as businesses increase production to meet higher demand, they may need to raise prices to cover higher costs. This is reflected in the long-run Phillips curve (LRPC), which shows the relationship between inflation and unemployment. If inflation increases, the LRPC shifts upwards, or in other words, LRPC increases.
So, the use of expansionary policies to increase investment spending would likely result in an increase in both the LRAS and the LRPC.
Similar Questions
How will an increase in investment that promotes long-run growth change the short-run aggregate supply curve (SRAS), the long-run aggregate supply curve (LRAS), and the production possibilities curve (PPC)?Elimination ToolSelect one answerASRAS Decrease, LRAS Decrease, PPC DecreaseBSRAS Decrease, LRAS Decrease, PPC IncreaseCSRAS Decrease, LRAS Increase, PPC IncreaseDSRAS Increase, LRAS Increase, PPC IncreaseESRAS Increase, LRAS Increase, PPC Decrease
which of the following is true about the long-run aggregate supply curve?
We know the long-run aggregate supply curve in the AD-AS model can shift. Which of the following situations will not result in a shift of the LRAS curve? The interruption of production due to a cyclone. Automation which improves productivity. An influx of highly skilled workers through immigration. Changes in the endowment of natural resources. Changes in technology levels.
In the AD-AS model, a simultaneous increase in consumer confidence (leading to more consumption) and a technological breakthrough (leading to more productive capabilities) will have which of the following effects on the Aggregate Demand (AD) curve and the Long-Run Aggregate Supply (LRAS) curve?This is a multi answer question. You can select one or more options as the answer.A.AD shifts to the right; LRAS remains unchanged.B.AD shifts to the left; LRAS shifts to the right.C.AD shifts to the right; LRAS shifts to the right.D.AD remains unchanged; LRAS shifts to the left.
we distinguish between the long-run aggregate supply curve and the short-run aggregate supply curve. in the long run
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