Question

2. The U.S. economy experienced large trade deficits in the 1980s and 1990s and tremendous economic growth in the mid- and late-1990s.
b. Explain verbally the relationship between investment and long-term economic growth and describe the relationship graphically in an AD/AS graph.

Answer 1

a.Trade deficit occurs when imports of a country is greater than its exports. Outflow of goods and services is less than the inflow of goods, under trade deficit. If a society invests more, they increase their capacity to produce more goods and services at lower costs, which result in greater productivity and economic growth. Investment is a component of aggregate demand, therefore, an increase in investment will boost aggregate demand and economic growth.