Question

Define capital stock. use the aggregate demand and supply to show the effects of a decrease in interest rates in the short-run and in the long-run. explain why an increase in consumer spending would not have the same effect in the long-run.

Answer 1

Answer:

Decrease of interest rates will lead to monetary expansion, however higher consumer spending in the long run would not have the same effect,as only investments lead to economic growth.

Explanation:

Capital stock is the total amount of capital used in the production of goods and services, including factories, buildings, tools and machinery. In both short and long term, decrease of interest rates, leads to monetary expansion as it becomes cheaper to borrow money and this leads to aggregate demand and supply curves shift to the right. The short run aggregate supply curve is affected by production costs, taxes and costs of labor (wages). The long run is affected by the events that change the output of the economy. In the short run, some components such as capital invested are constant, only with cheaper labor and technological progress, shifts of the curve are possible. However, changes of interest rates in both short and long term period would have the same effect.  Higher consumer spending in the long run would not have the same effect as only investments cause economic growth or the increase of capital stock.