Investment and Long-Run Aggregate Supply Flashcards

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What is investment in economics?

Spending by firms on capital goods to produce more in the future.

What are capital goods?

Man-made items used to make other goods, like machines and buildings.

What is Long-run Aggregate Supply (LRAS)?

The maximum output an economy can make when resources are fully used.

How does more investment affect LRAS?

It increases capital stock. This raises capacity, so LRAS shifts right.

How can investment raise labour productivity?

New equipment helps each worker produce more per hour.

What is capital stock?

The total amount of machines, tools, and buildings used to produce.

How is net investment different from replacement investment?

Replacement just swaps old capital. Net investment adds extra capital and lifts LRAS.

Why can lower interest rates lead to more investment?

Borrowing is cheaper, so firms buy more capital. LRAS can rise later.

Does investment change LRAS straight away?

No. It takes time to plan, build, and install new capital.

How can a rise in LRAS affect inflation?

With more capacity, the economy can grow with less price pressure.