3.12 Investment spending in the multiplier model

what stimulates investment spending?

increase in aggregate spending on goods and services

aggregate investment function

I = a₀ - a₁r

a₀ = intercept at horizontal axis: amount of investment that would happen if interest rate fell to zero

is the slope of the aggregate investment function positive or negative

negative because as interest rate increases, investment decreases
**investment on x-axis, y-axis = interest rate

if there’s a fall in the interest rate in the economy, what happens

the economy moves along the investment function and investment increases.

**if the new, lower interest rate is held constant, the whole line shifts to the right by the change in investment

so how does a change in the interest rate affect the aggregate demand curve?

the aggregate investment function appears in the intercept term, so a decrease in r increases investment, meaning that it shifts the AD curve up. If r increases, investment decreases and AD shifts down.

steep vs. flat aggregate investment line

steep = more sensitive to change in interest rate

flat = less sensitive to change in interest rate