Question

INSERT YOUR ANSWERS UNDER EACH QUESTION – FIVE LINES MAXIMUM

1. Define the term investment and specifically describe two (2) factors that would cause it to increase. Be sure you specifically explain how your two factors might affect investment.

2. Specifically identify the two variables that are part of a discussion of the aggregate demand curve and describe the relationship between those variables. Identify which variable changes and describe how it affects the other variable.

3. What according to Keynes was a fertile breeding ground that might exist for the creation of demand-pull inflation? Be sure to use the appropriate terminology in your answer.

Please kindly answer the three questions... thanks

Answer 1

1. Investment refers to the accumulation of capital stock over time. Savings and investment in economics are used interchangeably. Investment in a good today is used to increase wealth or purchasing power in the future and is not to be consumed today. Factors that cause an increase in investment are:

a) The rate of Interest- When interest rate falls, it becomes cheaper to borrow from the bank or other lending institutions. Hence investment rate rises when the interest rate falls,

b) Income level- When income level rises, it tends to increase the level of savings hence investment as well. At a higher level of income people tend to save more. Hence, as income of people in an economy rises, savings rise as well.

2. AD= C+I+G+NX

C=consumption

I= Investment

G= government spending

NX= net exports

Taking the two factors as consumption and investment as required. Changes in these two variables affect the aggregate demand curve in the following way:

a)Consumption: An increase in consumption raise the aggregate demand in the economy and vice versa.

b) Investment- An increase in investment raises the aggregate demand in the economy and vice versa.

3. Demand-pull inflation occurs when demand is greater than supply. This lets producers raise the prices to due to high demand o that good. A loose monetary policy i.e. excessive money supply in the economy can create demand-pull inflation. In this case, people's purchasing power rises with no rise in the supply of goods. Hence, demand for goods rise as people wish to buy more but supply does not creating inflation.