Question

An increase in the capital stock would be expected to

decrease the labor force.

increase the level of output.

decrease real GDP per capita.

increase real GDP per capita.

The investment demand curve shows the amount businesses spend for investment goods at different possible:

price levels.

levels of GDP.

rates of interest.

levels of taxation.

Answer 1

1. When capital stock increases (and all other things remain equal), there will be an increase in the gross domestic product (GDP), and the price level will drop. The increase in GDP causes an increase in aggregate supply. When capital stock increases, the potential output increases, as firms can invest in technology and hence be able to better utilize their resources. This in turn allows them to be more productive and efficient. An example would be in the field of agriculture, where farms can build more sprinklers to water the crops at fixed intervals of time. This automated process reduces the need for labor and allows the process of farming to be less time-consuming and more efficient. This efficiency and productivity means that the economy will be able to produce more goods using less resources. Hence, aggregate supply rises. Thus, when aggregate supply rises, GDP increases and the price level decreases.

An increase in the capital stock would be expected to increase real GDP per capita which would ultimately increase the level of output.

2. With the Consumption Function, there are factors that will shift the entire Investment Demand Curve. These are non-interest rate determinants of Investment. While there are many things that can influence the level of investment in the economy other than the real interest rate, we will discuss only three.

1. Business Taxes—The government can influence the level of investment by the tax structure they impose on businesses. When the government gives tax incentives for investing in new capital (such as allowing businesses to depreciate new capital at a faster rate, or giving tax credits for new “green” investments), this encourages additional investment at all levels of the real interest rate and shifts the Investment Demand Curve to the right.
2. Changes in Technology—A business will be more likely to increase investment in an industry where technology is changing than in an industry with a more fixed technology. Businesses recognize the need to keep up with competitors’ utilization of modern technology. At any given level of the real interest rate you would expect Investment Demand to be higher the more technology is advancing.
3. Stock of Capital Goods on Hand—Businesses that already have a significant stock of capital on hand are less likely to invest in additional capital. For instance, a company that has excess office space or idle plants is not as likely to invest in additional capital as a business that is operating at or beyond capacity. At any given level of the real interest rate, you would expect more investment by a firm that is short on capital goods than by a firm that has an adequate stock of capital on hand.

The investment demand curve shows the amount businesses spend for investment goods at different possible:rates of interest.