In a closed economy explain how investment spending adjusts to equate aggregate supply with aggregate demand.
- In a closed economy explain how investment spending adjusts to equate aggregate supply with aggregate demand.
Homework Answers
Answer - The adjustment can be understood in two ways -
1 - When AD < AS - In this condition , the additional investment will generate the employment opportunities. These employment opportunities will increase the income of the households and thus , the demand will increase .
2 - When AD > AS - In this case , the investment done in the capital assets will bring up the productivity of the economy . Thus the supply will increase and hence adjust to the AD.
In these two ways , investment helps to adjust the equilibrium between AD and AS.
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In a closed economy explain how investment spending adjusts to
equate aggregate supply with aggregate demand.
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