2. Write an investment function (equation) that specifies two components: a. Autonomous investment spending b. Induced...

2. Write an investment function (equation) that specifies two components:

a. Autonomous investment spending

b. Induced investment spending

Solutions

Expert Solution

Investment can be classified into two types. They are induced investment and autonomous investment.

Induced Investment

An investment influenced by expected profit or rising levels of income in the economy is termed as induced investment. The factors that affect profits such as prices, wages, and interest influence induced investment. Likewise, it is also affected by demand. At higher levels of income, consumption expenditure (.i.e. demand) also tends to increase. Increased demand raises the expected profitability of the producers who are consequently induced to make more investment.Thus, induced investment is positively related to the levels of income in an economy. It increases with the rise in income and falls as income declines.

Autonomous Investment

An investment not influenced by expected profitability of level of income is termed as autonomous investment. It is an investment expenditure made by the government with a view of promoting the level of aggregate demand in the economy.When the level of aggregate demand falls short of the aggregate supply, the government tends to push up the level of aggregate demand through various governmental investment expenditures. Such investment is thus not influenced by profitability and so is independent of the level of income.

Rahul Sunny answered 1 week ago

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