10.4 Shifts of the Investment Demand Curve

What causes the investment demand curve to shift rightward?

Any factor that increases expected rates of return on investment (e.g., lower costs, tax cuts, tech progress, optimistic expectations).

What causes the investment demand curve to shift leftward?

Any factor that decreases expected rates of return on investment (e.g., higher costs, tax hikes, excess capital, pessimistic expectations).

How do acquisition, maintenance, and operating costs affect investment demand?

Higher costs → lower expected returns → curve shifts left.
Lower costs → higher expected returns → curve shifts right.

How do business taxes affect investment demand?

Higher taxes → lower after-tax returns → curve shifts left.
Lower taxes → higher after-tax returns → curve shifts right

How does technological change affect investment demand?

Innovation increases efficiency and profitability → curve shifts right.

How does the stock of capital goods on hand affect investment demand?

Overstocked firms → less incentive to invest → curve shifts left.
Understocked firms → more incentive to invest → curve shifts right

How do planned inventory changes affect investment demand?

Planned inventory increase → curve shifts right.
Planned inventory decrease → curve shifts left.

How do business expectations affect investment demand?

Optimism about future sales/profits → curve shifts right.
Pessimism → curve shifts left.

Why is investment considered unstable?

It fluctuates frequently and is the most volatile component of total spending.

Investment:

Investment is optional and postponable

Driven by expectations and confidence

Affected by interest rates

Multiplier effect amplifies changes

Big-ticket and lumpy

What causes variability in business expectations?

Events like policy changes, wars, trade barriers, and market shifts.

How does durability of capital goods affect investment volatility?

Firms can delay purchases → investment rises or falls based on optimism.

How does innovation affect investment volatility?

Major innovations trigger waves of investment, but occur irregularly.

How do profits affect investment volatility?

High profits → more funds and optimism → more investment.
Low profits → less incentive and ability → less investment

What increases investment demand?

Profitable new products

Increases in investment demand are…

Rightward shifts

Decreases in investment demand are…

Leftward shifts

What does the investment demand curve show…

How much businesses will invest at different real interest rates, assuming other things are constant

A movement along the investment demand curve happens….

When interest rate changes

Acquisition, maintenance, and operating costs

Lower costs → shift right; higher costs → shift left

Business taxes

Lower taxes → shift right; higher taxes → shift left

Technological change

New tech → shift right (more profitable investment)

Stock of capital goods on hand

If firms already have enough equipment → shift left

Planned inventory changes

If firms plan to build up inventory → shift right

Expectations about future profitability

Optimism → shift right; pessimism → shift left

When the economy is overstocked with production facilities and when firms have excess inventories of finished goods…

Expected rate of return on new investment declines —> leftward shift

When the economy is understocked with production facilities and when firms are selling their output as fast as they can…

Expected rate of return on new investment increases —> rightward shifta

Any factor that leads businesses collectively to expect greater rates of return on their investment…

Increases investment demand

Consumption spending is more _____ than investment spending?

Stable