When the economy is not at full employment, which component of GDP adjusts automatically in the long run to bring the economy back to full employment?
A) consumption
B) net exports
C) government spending
D) investment

Question

Quizplus · Accepted Answer

Investment is the component that adjusts automatically in the long run to bring the economy back to full employment because a decrease in aggregate demand in the short run reduces sales and profits of firms, leading them to reduce production, resulting in a reduction in investment spending. This decrease in investment spending will eventually lead to a reduction in capital stock, decreasing the potential output and ultimately bringing the economy back to full employment.

When the Economy Is Not at Full Employment, Which Component