APMacro: Investment Demand


invest demand graph
The firm’s decision to invest in plant and equipment depends on the marginal benefit and marginal cost of the investment. Therefore, if the expected rate of return on the investment is greater than the real interest rate for the loan to make the purchase, the firm will make the investment. Other factors that can affect business investment include the costs to operate and maintain the capital, business taxes, changes in technology, the stock of capital goods on hand, planned inventory changes, and expectations for business conditions.

Household consumption tends to remain relatively stable, investment spending is the most volatile component of the economy. Unexpected changes in investment spending account for most of the changes in output and employment in the business cycle. Changes in investment result from changes in business expectations, the durability of capital, the irregularity of innovation, and the level of profit.

Arrows-02-june

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