Question

Suppose the amount of buildings and machinery in the U.S. decreases.

a. Which curve(s) shifts and why? Graph the Goods and Services market including the shift(s).

b. What happened to the price level and RGDP?

c. Will this cause a temporary business cycle? Why or why not?

Answer 1

Ans.

- Companies are the primary source of investment spending (I). They make investment decisions in order to expand their stock of physical capital, such as building new factories or adding new equipment to existing facilities.

- A definition of physical capital is any manmade aid to production. Companies also buy investment goods, such as manufacturing plants and equipment to replace existing facilities and equipment that wear out. Total investment, including replacement of worn- out capital, is called gross investment.

- When an economy is underutilizing its resources, interest rates are typically very low and yet investment spending often remains dormant because the expected return on new investments is also low

- If amount of buildings and machinery in the U.S. decreases  

o It will impact the IS curve – Since investment are low , investment (I) and saving (S) are the primary components that adjust to maintain the balance between aggregate expenditure and income.

o

o Real GDP and the price level will come down

o Yes it will cause the drop in the business activity and will lead to contraction and recession.