Question

Question: Describe whether the following changes cause the long-run aggregate supply curve to increase (shift right), decrease (shift left), or neither.

The stock of capital in the economy increases.

Answer 1

An increase in the stock of capital in the economy causes the long-run aggregate supply curve to shift to the right, indicating an increase in the economy's potential GDP and productivity.

Step-by-step explanation:

When the stock of capital in the economy increases, it enhances the productive capacity of the economy which in turn causes the long-run aggregate supply (LRAS) curve to shift to the right. This rightward shift signifies an increase in the potential GDP or the full employment level of GDP, reflecting economic growth.

An increase in capital stock can lead to productivity improvements as firms have more or better-quality capital to work with. This is similar to how improvements in technology reduce production costs and cause an increase in supply, represented as a rightward shift in the supply curve.