Factory Construction Boom
The question
Assume the economy of Ostravia is initially in long-run equilibrium. Expecting strong sales for years to come, firms across Ostravia begin construction this year on a large number of new factories, none of which will be finished or able to produce any output for several years. Show the effect on Ostravia's economy this year, holding all else constant. Show the effect on the AD-AS Model graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Factory Construction Boom: the worked answer
On the AD-AS Model graph, AD shifts right.
Why AD shifts right
Spending by firms on new factories is investment, a component of aggregate demand, so the construction under way this year raises total spending at every price level and shifts aggregate demand to the right. None of the factories can produce output for several years, so the economy's productive capacity this year is unchanged and long-run aggregate supply does not move. Firms' current per-unit production costs are also unaffected, so short-run aggregate supply stays put.
What happens to the equilibrium
The equilibrium price level rises and real GDP increases above full-employment output, creating an inflationary gap.
The mistake students make on this one
The tempting error is to shift LRAS right at the same time, since the economy is adding factories. Capital raises potential output only once it is finished and producing, and the stem places that several years away, so in the current year the event is pure spending and only AD moves.
On exam day
Investment appears twice in macro, as spending today that shifts AD and as capital tomorrow that shifts LRAS, so let the time frame in the stem decide which one the question is asking about.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when AD shifts right and every other curve on the AD-AS Model graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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