Answer to Question #186874 in Economics for Shaikha

Question

Suppose the economy is in long-run equilibrium and there is an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run.

A) increase; increase further

B) increase; decrease to its initial value

C) decrease; decrease further

D) decrease; increase to its initial level

Answer: B

Please provide a brief explanation for the correct answer.

Answer 1

Real GDP will increase in the short run as a result of a rightward shift of the aggregate demand AD curve, and in the long run the aggregate supply curve will shift to the left, so real GDP will decrease to its initial value.