Answer to Question #300006 in Macroeconomics for Fanatic

Question

Briefly explain any two determinants of investment spending

Answer 1

(I).Expectations

A exchange in the capital inventory changes future production capacity. Therefore, plans to exchange the capital inventory rely crucially on expectations. A company considers in all likelihood future sales; a pupil weighs prospects in specific occupations and their required academic and education levels. As expectations trade in a way that will increase the anticipated return from investment, the investment demand curve shifts to the right. Similarly, expectations of reduced profitability shift the investment demand curve to the left.

(ii).The Level of Economic Activity

Firms want capital to produce goods and services. An expand in the degree of production is possibly to improve demand for capital and for this reason lead to greater investment. Therefore, an enlarge in GDP is possibly to shift the investment demand curve to the right.

To the extent that an expand in GDP boosts investment, the multiplier effect of an preliminary trade in one or more elements of mixture demand will be enhanced. We have already seen that the expand in manufacturing that occurs with an initial enlarge in aggregate demand will amplify household incomes, which will make bigger consumption, for that reason producing a further make bigger in aggregate demand. If the enlarge additionally induces corporations to expand their investment, this multiplier impact will be even stronger.