You asked: Why the investment function is horizontal?

The investment function is drawn as a horizontal line because investment is based on interest rates and expectations about the future, and so it does not change with the level of current national income. In this example, investment expenditures are at a level of 500.

What is investment function in macroeconomics?

The investment function is a summary of the variables that influence the levels of aggregate investments. It can be formalized as follows: I=f(r,ΔY,q) – + + where r is the real interest rate, Y the GDP and q is Tobin’s q.

What causes a downward movement along the investment function?

Downward-Sloping IS Curve

When the interest rate falls, investment demand increases, and this increase causes a multiplier effect on consumption, so national income and product rises.

Why is savings a vertical line?

The vertical line represents savings – the supply of loanable funds. The downward sloping line represents investment – the demand for loanable funds. The interaction of these two curves determines the equilibrium interest rate.

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What is the difference between consumption function and investment function?

Consumption is the flow of households’ spending o goods and services which yield utility in the current period. … Investment is firms ‘spending on goods which are not for current consumption but which yield a flow of consumer goods and services in the future.

What is MEC investment function?

Generally, marginal efficiency of capital or MEC refers to the expected rate of profit or the rate of return from investment over its cost. …

What are determinants of investment function?

The other determinants of investment include expectations, the level of economic activity, the stock of capital, the capacity utilization rate, the cost of capital goods, other factor costs, technological change, and public policy.

Why is aggregate supply upward sloping?

The short-run aggregate supply curve is upward sloping because the quantity supplied increases when the price rises. In the short-run, firms have one fixed factor of production (usually capital ). When the curve shifts outward the output and real GDP increase at a given price.

In which of the following case LM curve is horizontal?

c) If money demand does not depend on income, the LM curve is horizontal. … For any given level of real balances M/P, there is only one level of the interest rate at which the money market is in equilibrium. Hence, the LM curve is horizontal.

Why is IS curve downward sloping?

Downward-Sloping IS Curve

The IS curve is downward sloping. When the interest rate falls, investment demand increases, and this increase causes a multiplier effect on consumption, so national income and product rises.

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What is MEC theory?

Marginal efficiency capital (MEC) is a Keynesian concept.

Well, this depends on the productivity of new capital i.e. on the marginal efficiency of capital. Marginal efficiency of capital is the rate return expected to be obtainable on a new capital asset over its life time.

What is APS and MPS?

Simply put, total saving (S) divided by total income (Y) is called APS (APS = S/Y) whereas change in savings (∆S) divided by change in income (∆Y) is called MPS (MPS = ∆S/∆Y).

What is MPS in economics?

Marginal propensity to save (MPS) is used by economists in order to quantify the relationship between changes in income and changes in savings. It refers to the proportion of a raise in pay that a consumer saves rather than uses for consuming goods and services.

How does an investment function relate to consumption function?

Aggregate Expenditure: Investment as a Function of National Income. Just as a consumption function shows the relationship between real GDP (or national income) and consumption levels, the investment function shows the relationship between real GDP and investment levels.

What is Keynesian theory of consumption?

Keynes was of the view that rich people relatively save a higher proportion of their income so that at higher levels of income average propensity to consume (APC), that is, proportion of total consumption to national income falls as national income rises.

Is investment consumption or saving?

In a Keynesian sense, savings is whatever is left over after income is spent on consumption of goods and services, investment is what is spent on goods and services that are not ‘consumed’, but are durable.

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