Discuss the impact of the planned investment by Intel in a new semiconductor factory on Germany’s aggregate demand

Edexcel A-Level Economics Paper 2 June 2015 Extract

With reference to Extract B, discuss the impact of the planned investment by Intel in a new semiconductor factory on Germany’s aggregate demand. Use an aggregate demand and aggregate supply diagram in your answer. (12 marks)

The impact of this investment by Intel is an increase in Germany's aggregate demand. Investment refers to an increase in spending by firms on capital goods like machinery. Here, Intel are investing in a semiconductor factory. The extract mentions Intel doubling its investment to €30bn. Investment is one of the components of aggregate demand, which is equal to C+I+G+(X-M). As investment increases, aggregate demand shifts to the right. This is accompanied by further increases in aggregate demand as shown in the diagram below. This is known as a multiplier effect. For example, an increase in economic growth due to Intel's investment can boost business confidence. This can encourage other firms in Germany to also invest more, due to animal spirits. Additionally, this new factory might create new jobs. The extract mentions 7000 construction jobs and 3000 permenant high-tech jobs. This leads to higher incomes and consumer confidence, which will lead to greater consumer spending, which is another component of aggregate demand. Overall, the diagram shows this causes an increase in economic growth from y1 to y3 as real gdp increases, and an increase in the price level from p1 to p3.

However, the overall effects of such an investment on aggregate demand will depend on the size of the multiplier effect. The multiplier is determined by the equation k=1/(1-MPC). So, for example, if the 7000 construction workers were previously on low or no income, they would be likely to have a high marginal propensity to consume, as each extra £1 would significantly improve their standards of living. Therefore, they are more likely to spend it, meaning that the size of the multiplier is likely to be higher. This could mean that inflation increases more than expected. This also depends on the state of the economy, as inflation will increase much faster if the economy is already close to full capacity.

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