The graph shows the short-run effect of the change in investment spending as a rightward shift of the aggregate demand curve, resulting in a higher equilibrium price level and higher equilibrium actual output that is less than full-employment output, labeled PL2 and Y2, respectively.
**Short-run effects of an increase in investment spending:**
* **Increase in aggregate demand:** The increase in investment spending leads to a rightward shift of the aggregate demand curve from AD to AD2.
* **Increase in actual output:** The economy moves from point Y1 to point Y2 along the short-run aggregate supply curve SRAS. This represents an increase in real output from Y1 to Y2.
* **Increase in price level:** The price level rises from PL1 to PL2.
**Explanation:**
* The increase in investment spending injects additional demand into the economy, causing businesses to produce more output.
* In the short run, businesses are limited in adjusting their production capacity. Therefore, they respond to the increase in demand by raising prices.
* As a result, the equilibrium point moves from Y1, PL1 to Y2, PL2.
**Key points to note:**
* The increase in actual output (Y2 - Y1) is less than the increase in aggregate demand (AD2 - AD1) due to the upward slope of the short-run aggregate supply curve.
* The economy still operates below its full-employment output level (YF) at point Y2.
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