investment

• investment refers to spending by firms on capital expenditure like machinery, factories, buildings, and equipment. this increases the capital stock of a firm and their capacity to produce
• investment makes up around 20% of all aggregate demand
• Higher availability of credit increases investment as firms can finance capital expenditure more easily
• higher corporation tax can reduce investment as firms will have less retained profit. higher taxation may also decrease FDI
• Animal Spirits influence investment as emotions and instincts guide human behaviour, Keynes emphasized the importance of gut instincts for macroeconomic prospects
• if there is higher demand for exports, there will be higher investment from firms who aim to produce more good and services
• Accelerator effect: higher consumption leads to more production being needed, this requires capital expenditure causing an increase in

  investment by firms. this leads to an increase in employment and income as more employees are required to produce more, therefore leading to an increase in consumption which in turn causes higher investment (this occurs in an economic recovery)
• investment is affected by the Paradox of Thrift: if firms fear falling profit and recession, they may postpone their investment, and consumers will stop spending. However, this makes matters worse by accelerating a recession
• Businesses will only increase their capacity if economic growth is anticipated, therefore economic uncertainty will cause less investment e.g. during the brexit negotiations