Use AD/AS model to show effects on GDP and price level of an increase in capital stock.

In the long run, an increase in capital stock in an
economy will lead (all other things being equal) to an increase in the gross domestic
product and to a decrease in the price level.  This is because such an increase will
cause an increase in aggregate supply.

When capital stocks
increase, what is happening is that the capacity of the economy to create things is
increasing.  As firms buy more machinery, or more sophisticated machinery, the
productivity of the economy increases.  This means that the economy will be able to
produce more goods using fewer resources (particularly, using less labor).  When this
happens, aggregate supply rises.

When aggregate supply
rises, all other things being equal, prices go down and GDP goes
up.