Explain the effects of public investment on iaggregate deman

Explain the effects of public investment on

i)aggregate demand

ii) aggregate supply.

Solution

The public investment is the investment made by the government which the private sector cannot able to make any investment. The public investment is a part of the government spending and the government spending is the component of the aggregate demand. The increase in the public spending will increase the aggregate demand so the aggregate demand curve will shift to the right. The intial increase in the public spending will likely to create a multiple effect in the economy and will be a strong further shift in the aggregate demand. When the aggregate demand rises the inflation and output in the country rises.

In the long run the aggregate supply will increase due to the increase in the productive capacity of the nation so here the aggregate supply will shift to the right which will helps to reduce the effect of inflation.