Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 3 (Long-run demand for investment (Changes in capital stock…
Chapter 3
-
-
The investment function
-
Driven by three factors
- expected aggregate demand in the next period - determines how much capital is needed
- the stock of capital at the beginning of the period - the more capital we have, the smaller is the need to make additional investments
- the real interest rate - determines the required return on the investment
The accelerator effect
Investment is volatile because the desired capital stock is more than twice as large at GDP and because firms want to keep a certain relationship between production and the capital stock. If expected demand increases by 2%, the desired capital stock increases by 2%, but this corresponds to around 5% of aggregate demand
This calculation is over exaggerated however, 1. because investment takes time and there are various lags which slow down investment responses to changes in demand. 2. Investors may form expectations in more sophisticated ways
-
-
