Answer to Question #15053 in Macroeconomics for jack

Question

Using AD/AS, describe the short-run and long-run effects of :
(a)The Central Bank within the economy lifts interest rates.
(b)There is an increase in private domestic investment spending.

Answer 1

a) This will lead to a fall in AD, thus a fall in price level & economic growth
b) an increase in private domestic investment spending will increase aggregate demand, because factors of production (capital) depreciates and it's required to spend some capital to maintain it on sustainable level (there also is NET private domestic investments). If there will be fall in capital stock economy will start to shrink. All what produced by capital and labor is received by population in a form of income and population are creating aggregate demand.