What eat effect does the drop in business inve Show more Refer back to Example 8-2 A Tale of Two Economics. What eat effect does the drop in business investment have on the LRAS? Example 8-2 The American economy went into a short recession in 2001 and was still below its potential output in 2004. Canada on the other hand experienced only a short slowdown. The two economies are usually strongly linked experiencing recessions at about the same time. Why the difference this time? In the United States business investment in equipment (much of it in computers and software) fell by $100 billion between 2000-2001. Since then it has rebounded. Nevertheless this sudden drop in business equipment and software investment accounted for half of the overall decline in total American planned investment that occured during this perod. To examine how this drop in business equipment and software investment tended to affect the American economy consider Figure 8-9. By the late spring of 2001 annualized real GDP was close to US$9.4 trillion. The investment decline was induced a leftward shift in aggregate demand from AD1 to AD2. Abstracting from other factors that possible contributed to changes in aggregate demand or aggregate supply we can conclude that this caused equilibrium to move from E1 to E2 implying a decrease in equilibrium real GDP and a fall in the equilibrium price level. Indeed by early autumn 2001 American real GDP had declined to US$9.3 trillion and the price level dropped slightly from 109.8 to 109.7. The decline in total planned expenditures caused by the fall-off in business investment spending temporarily pushed the economy to the left of its long -run aggregate supply curve. Why didnt the same thing happen in Canada? Because Canadian businesses were much slower to invest in the internet and other computer-related industries the change in spending was much smaller. Some well-known Canadian firms however did suffer greatly. Nortel Networks a supplier of communications and internet-related equipment was dramatically affected. At one time worth almost as mch as the rest of the shares traded on the Toronto Stock Exchange(TSE) Nortel fell from a shoare value of ver $100 to less than $1! Show less
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