Question

Why is investment the most volatile sector of aggregate demand?

Answer 1

Investment is the most volatile sector of the aggregate demand.

Aggregate demand includes Consumption(C), Investmemt(I) Government Expenditure (G) and Net Export (X-M).

Consumption is more predictable since it is dependent on the income. The more the income of individuals more will be the consumption.

Government expenditure is determined at the very beginning of the financial year through the fiscal policies which is presented in the federal budget.

Net exports are volatile in nature since, it is dependent on the world market price but we can control the volatility through various trade agreements. So, we can reduce the volatility of net exports.

Investment is considered to be most volatile because of its unpredictable nature. Since, investment is dependent on the prevailing interest rate and the market condition. It is significantly affected by the cyclical nature of the economy. People invest sometimes in risky securities and sometimes tgey disinvest. Thus, it is really tough to predict when people will be investing and when they will withdraw from the market.

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