3.7: Long Run Self Adjustment

Question 1

What happens in the short run when consumer spending increases

Answer 1

AD increases so PL and Q increases

Question 2

What happens in the long run when consumer spending increases

Answer 2

Wages/Costs increases, so AS falls, economy returns to long-run equilibrium

Question 3

If consumer spending decreases, what will happen in the short run?

Answer 3

AD falls, so the PL and output fall

Question 4

If consumer spending decreases, what will happen in the long run?

Answer 4

Wages/costs eventually decreases

Question 5

Capital Stock

Answer 5

Machinery and tools purchased by businesses that increase their output

Question 6

Why does investments cause economic growth?

Answer 6

Investment cause growth b/c firms are increasing their capital stock