Economics! AD/AS graph- 10 points

Question

Without notice, investment dramatically rises in the United States.

a. Using aggregate demand and aggregate supply analysis, show and explain the short run impact of this sudden increase in investment on each of the following for the United States.

i. Output

ii. Price Level

Explain how the resultant change represented by the AD/AS graph will affect the credit market (borrowers, savers, and lenders).

HOW DOES THE AD/AS GRAPH SHIFT?? THIS IS VERRRY IMPORTANT!!!

Answer 1

In short-run there will be increase (right-ward shift) in AD, it will increase both - price level (if it's not completely sticky) and equilibrium output.

i - Output increases (in short-run for Keynesian model)

ii - Price level:

...a) does not change (in short-run for perfectly sticky prices/wages model)

...b) increases a bit (but very slow in the beginning)

Borrowers will be in winning situation if there is unexpected inflation and lenders will loose part of profits in this case. Savers are considered as lenders - because they store their wealth in money-type assets (bonds, shares, etc) which provide nominal interest profits rather than real (which will be reduced due to higher than expected inflation). Some savers may win a bit due to higher returns from shares (due to increased aggregate demand) - but all depends on how price level will react and if it were expected or not.

P.S. Thanks for asking again :)