Investment and Economic Activity

Read this chapter to examine factors that determine private investment and its link to output within the macroeconomy. Private investment plays an important role in the short run by influencing aggregate demand, and in the long run by influencing the rate of growth of the economy.

14.2 Determinants of Investment


  • The quantity of investment demanded in any period is negatively related to the interest rate. This relationship is illustrated by the investment demand curve.
  • A change in the interest rate causes a movement along the investment demand curve. A change in any other determinant of investment causes a shift of the curve.
  • 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.