The recent slowdown in domestic economic activity has left many firms operating with significant spare capacity. Despite central bank efforts to keep borrowing costs at historic lows, private sector investment has remained subdued. Business surveys indicate that this sluggishness is driven primarily by weak consumer demand and high economic policy uncertainty. Corporate balance sheets, however, remain highly liquid, with firms holding record cash reserves.
Industry analysts argue that these cash reserves represent pent-up investment demand. Once the recovery gains firm traction, it is highly likely that we will observe a substantial surge in private sector capital investment. As consumer confidence restores and demand rises, firms will need to expand their productive capacity to avoid losing market share. This rebound in investment will be crucial not only for boosting aggregate demand but also for driving long-term productivity growth.
Extract C suggests that 'Once the recovery gains firm traction, it is highly likely that we will observe a substantial surge in private sector capital investment.'
Explain why a sustained economic recovery is likely to lead to an increase in business investment.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.