As its capital stock increases, a nation will move rightward along a fixed produ
ID: 2495028 • Letter: A
Question
As its capital stock increases, a nation will
move rightward along a fixed production function
move leftward along a fixed production function
find its production function shifting upward
find its production function shifting downward
experience no change in the marginal product of labor
A.move rightward along a fixed production function
B.move leftward along a fixed production function
C.find its production function shifting upward
D.find its production function shifting downward
E.experience no change in the marginal product of labor
Explanation / Answer
As its capital stock increases, a nation will find its production function shifting upward.
The importance of the capital stock as an aggregate supply determinant is especially important for the long run expansion of the economy. The capital stock has been a key reason that our modern economy has grown, progressed, and is able to produce trillions of dollars worth of goods and services every year. This capital expansion not only shifts the short-run and long-run aggregate supply curves, it also tends to be subtle and generally overshadowed by business-cycle-inducing shifts of theaggregate demand curve. While the current capital stock can be readily compared with that from a few decades back to note dramatic changes, the year-to-year changes are easy to overlook and can be taken for granted.
However, increasing the capital stock is not automatic. Business firms must commit annual investment expenditures to the purchase of new capital over and above the depreciation of existing capital. But such investment is inherently a risky undertaking affected by a number of influences, including interest rates, government policies, technology,inflation, business cycles, political unrest, and a host of others.However, investment also affects the capital stock and thus aggregate supply. At the same time a change in investment shifts the aggregate demand curve, it also affects the capital stock, which causes shifts of the aggregate supply curves.
One of several specific aggregate supply determinants assumed constant when the aggregate supply curves (both long run and short run) are constructed, and which shifts the aggregate supply curves when it changes. An increase in the capital stock causes an increase (rightward shift) of both aggregate supply curves. A decrease in the capital stock causes a decrease (leftward shift) of both aggregate supply curves. Other notable aggregate supply determinants include the technology, energy prices, and the wages. Capital stock comes under the resource quantity aggregate supply determinant.
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