Consequence of Decreasing Investment

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Submitted By sblouis
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Assess the consequence for the UK economy of a significant fall in investment spending. (25)

Investment is the spending on adding to the capital goods. The UK economy is assessed by its macroeconomic objectives such as economy growth, unemployment, inflation and trade. The change in investment will affect the UK’s economy both in short term (changes in AD) and long term (changes in productive possibility LRAS).

Extract B line 8-10 suggested that ‘Weaker demand makes investment less profitable and uncertainty about the severity of the recession leads companies to delay spending on investment projects.’ This means that the decrease in investment is caused by the lack of confidence in the economy, if households confidence to consume decreased it will lead to a decrease in consumption and the willingness for firms to invest depend on the level of consumption, if level of consumption decreased , investment will also decrease. Extract B line 12-13 also suggested that ‘Confidence in the banking sector has been knocked so severely that banks are keeping very tight controls on their lending to companies.’ As the confidence in the banking sector decreased, this will limit the credit availability to the firms, many companies invest using loans from the bank, as the availability of credit decreased it will lead to a further decrease in investment.

In the short term, investment is a positive component of AD and a fall in investment will lead to a leftward shift for AD curve. As AD move from AD to AD1 it will lead to a fall in output, shown as ‘R’ to ‘R1’ Extract B suggested ‘UK businesses are struggling in the economic downturn’ this means UK’s economy is already in recession (a negative output gap) the fall in AD will make the recession worse. Less investment and economic growth might lead to decline in capital stock, investment stimulate innovation, therefore the decrease…...

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