Use AD/AS model to show effects on GDP and price level of an increase in capital stock.

Expert Answers

An illustration of the letter 'A' in a speech bubbles

In the long run, an increase in capital stock in an economy will lead (all other things being equal) to an increase in the gross domestic product and to a decrease in the price level.  This is because such an increase will cause an increase in aggregate supply.

When capital stocks increase, what is happening is that the capacity of the economy to create things is increasing.  As firms buy more machinery, or more sophisticated machinery, the productivity of the economy increases.  This means that the economy will be able to produce more goods using fewer resources (particularly, using less labor).  When this happens, aggregate supply rises.

When aggregate supply rises, all other things being equal, prices go down and GDP goes up.

Approved by eNotes Editorial Team
Soaring plane image

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial