1. Chapter 14 Investment and Economic Activity

2. 1. THE ROLE AND NATURE OF INVESTMENT
Learning Objectives
Discuss the components of the investment spending category of GDP and distinguish between gross and net investment.
Discuss the relationship between consumption, saving, and investment, and explain the relationship using the production possibilities model.

3. 1.1 Components of Investment

4. 1.2 Gross and Net Investment

5. 1.3 Volatility of Investment

6. 1.4 Investment, Consumption and Saving
If depreciation equals IA then net investment is zero and PPC does not shift. D CD A CA B
By reducing consumption and increasing investment the PPC shifts outward. Allowing more consumption CB
PPC2
PPC1 IA IB ID

7. 2. DETERMINANTS OF INVESTMENT
Learning Objectives
Draw a hypothetical investment demand curve, and explain what it shows about the relationship between investment and the interest rate.
Discuss the factors that can cause an investment demand curve to shift.

8. 2.1 Interest Rates and Investment
The investment demand curve is a curve that shows the quantity of investment demanded at each interest rate with all other determinant of investment unchanged.

9. 2.2 Other Determinants of Investment Demand
Expectations
The level of economic activity
The stock of capital
Capacity utilization
The capacity utilization rate is a measure of the percentage of the capital stock in use.
The cost of capital goods
Other factor costs
Technological change
Public policy

10. 3. INVESTMENT AND THE ECONOMY
Learning Objectives
Explain how investment affects aggregate demand.
Explain how investment affects economic growth.

11. 3.1 Investment and Aggregate Demand8 B 6 C D
1.0
ΔI=$50
ΔAD=$100 ID
AD1
AD2
$950
$1,000
$8,000
$8,100

12. 3.2 Investment and Economic Growth
Investment adds to the capital stock
An increase in capital stock leads to an outward shift of the PPC
This allows more consumption
The long run AS curve also shifts to the right
The increase in investment also affects aggregate demand