Question

Suppose the president gets Congress to pass legislation that encourages investment in research and the development of new technologies. Assuming this policy leads: to a positive productivity change for the U.S. economy, use aggregate demand and supply analysis to predict the effects on inflation and output. Demonstrate these effects on a graph.

Short answer

The following is a diagram depicting the impact of research and development spending on inflation and output:

Step-by-step solution

Step 1. Concept introduction

The term "investment in research and development" refers to money spent on activities aimed at improving existing products or developing new ones.

Step 2. Explanation

The following is a diagram depicting the impact of research and development spending on inflation and output:

Image Caption

Where in Figure 1,

- The long-run aggregate supply curve is abbreviated as LRAS.

- The aggregate supply curve is short (AS).

- The aggregate demand curve is AD.

Investment in research and development leads to advancements in technology, which has an impact on the aggregate supply curve in the long run. Both the long and short supply curves are shifted to the right as a result of this innovation and updated technology. With technical developments, productivity rises, resulting in lower inflation and higher output levels in the long run.