An emerging economy changes its policy, attracting more foreign direct investment, which leads to the accumulation...

An emerging economy changes its policy, attracting more foreign direct investment, which leads to the accumulation of a more productive capital stock. (a) How does this policy afect the aggregate output, consumption, employment, and real wage? Explain your results with a diagram and illustrate the income and substitution efects.

Expert Solution

When emerging economies attract foreign investment it helps to boost the economic growth . Increase in investment leads to rise infrastructure expenditure by the government causing demand for more productivity , this increases labor demand and employment is generated in the long run when demand increases product become more productive and are sold at high prices . High price is then substituted by increase in nominal wage which means it has a positive effect on the real wage in the economy.

Rahul Sunny answered 2 years ago

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