Investment and Economic Activity Read Chapter 14 pages I The Role and Nature of Investment A) Investment adds to the nation’s capital stock and thus shifts the production function upward. B) Investment is a component of aggregate demand.

C) Components of Investment 1) Nonresidential structures. 2) Non residential Equipment and Software. 3) Residential Structures and Software. 4) Change in Inventories. D) Gross and Net Investment NPDI = GPDI-depreciation. The largest part of GPDI is depreciation.

E) The Volatility of Investment Investment is by far the most volatile component of GDP F) Investment, Consumption and Saving The following figure shows that by reducing consumption today and thus increasing savings and investment, the production possibilities curve will shift outward.

II Determinants of Investment A) Interest Rates The investment demand curve for the economy is a curve that shows the quantity of investment demanded at each interest rate, with all other determinants of investment unchanged.

B) Expectations especially for future profits. C) The level of economic activity. D) The current stock of capital E) Capacity Utilization – The capacity utilization rate measures the percentage of the capital stock in use. Typically in the low 80’s in percentage terms. F) The cost of capital goods. G) Other factor costs, especially labor. H) Technology change. I) Public policy, especially tax policy.

III Investment and the Economy A)Investment and Aggregate Demand. A reduction in interest rates will stimulate investment spending which will result in a multiple increase in aggregate demand. B) Investment and Economic Growth. An increase in investment will increase productive capacity, thus shifting the production possibilities curve and the long run aggregate supply curve outward.