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Investment and The Economy

24 April, 2015 - 11:52

Learning Objectives

  • Explain how investment affects aggregate demand.
  • Explain how investment affects economic growth.

We shall examine the impact of investment on the economy in the context of the model of aggregate demand and aggregate supply. Investment is a component of aggregate demand; changes in investment shift the aggregate demand curve by the amount of the initial change times the multiplier. Investment changes the capital stock; changes in the capital stock shift the production possibilities curve and the economy’s aggregate production function and thus shift the long- and short-run aggregate supply curves to the right or to the left.