AD + Investment

• Investment is a key part of the aggregate demand equation and if investment increases or decreases, aggregate demand will shift either right or left.
• In economics, investment is when firms spend money on capital goods to increase their productive capacity.
• Interest rates can influence the level of investment as firms can finance investment by borrowing money or by investing profits.
• The marginal propensity to invest increases with a decrease in interest rates.
• The hurdle is the required rate of return that firms need for investment projects to go ahead.
• If interest rates are lower, reaching that hurdle becomes easier, increasing the marginal propensity to invest and increasing borrowing for investment.
• If interest rates are high, investment will be lower and aggregate demand will shift left.
• Business confidence is very important in determining investment as it is determined by the expectations of future profit and demand in the economy.
• High business confidence is likely to incentivize investment, while low business confidence implies less investment and therefore lower aggregate demand in the economy.
• Taxation on business profits reduces the level of retained property, potentially limiting the business's ability to invest.
• There are two main ways of financing investment: borrowing money or using retained profits.
• The accelerator effect is linked to the determinants of investment.
• If competition is high, businesses are likely to increase investment to stay ahead of their competitors.
• If the expected level of demand in the economy is high, it can encourage more investment.
• If businesses are operating close to full capacity, there is a strong incentive to invest to increase capacity.
• The price of capital machinery can affect the cost of investment, with a low price encouraging more investment.
• The accelerator effect is when there is an increasing rate of real GDP in the economy which encourages further investment.
• The level of competition in the economy and the level of technology available can influence a business's marginal propensity to invest.
• If corporation tax is low, retained profits are higher, giving businesses the potential to invest more.
• Businesses with a high level of spare capacity have less incentive to invest, as there is no need to increase capacity.
• The level of corporation tax can affect investment as retained profit is the profit left after corporation tax has been paid.