Question

If foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model.

Short answer

Increase in investment will lead to increase in Aggregate demand.

Step-by-step solution

Aggregate demand : 

The entire quantity of products and services sought by customers at a particular price level and period is known as aggregate demand.

Investment increase in United States impact : 

As foreign wealth holders are pleased about the United States' future prospects, it suggests they are confidence in the economy's health. People will put their money into the United States. As a result, AD will rise as a result of investment. Increased investment will result in a rise in AD.

In the figure above, the AD curve has shifted rightward from AD to AD1, resulting in an increase in Real National Output and a price level increase from P to P1. Increased employment follows an increase in the AD curve. The economy has approached its potential GDP.