1. Using Aggregate Demand and Aggregate Supply depict what will happen should the population decide to...

1. Using Aggregate Demand and Aggregate Supply depict what will happen should the population decide to save more. (Rationalize and depict two correct answers on separate graphs)

2. Using Aggregate Demand and Aggregate Supply depict what will happen should industry invest more in capital equipment.

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Expert Solution

Increase in savings will translate into lower consumption levels, thereby leading to reduced demand and shifting the demand curve to the left. When the demand curve is shifted to the left, the equilibrium price level falls down. Further, increased savings also translates into increased investment. Increased investment leads to increased supply and thereby shifting the supply curve to the right. When the supply curve shifts to the right, the price level falls down further.

An increase in industry investment in capital equipment leads to increased supply of goods, thereby causing the supply curve to shift to the right. An increase in capital investment also leads to increased profit levels for the firms, which further translates into increase wages/income levels of the workers. This increased income levels means that there is increase in consumption levels as well, which shifts the demand curve to the right. A rightward shift of demand curve leads to increase in equilibrium price level.

Rahul Sunny answered 1 year ago

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