What is the chief determinant of the Investment Demand curve (what is on the vertical axis...

What is the chief determinant of the Investment Demand curve (what is on the vertical axis and why)?

Expert Solution

Answer.) The downward-sloping investment demand curve shows the relationship between real interest rates and investment.

Investment depends on two factors:

Expected profit rate — the profit rate from an investment. The expected profit rate depends on the phase of the business cycle, advances in technology, and taxes.

Real interest rate — the opportunity cost of the funds used to make an investment

Investment demand shown in figure above is the relationship between the real interest rate and the amount of investment. The relationship between the real interest rate and the quantity of investment demanded is negative. An increase in the real interest rate decreases the quantity of investment, which translates into a movement along an investment demand curve. An increase in the expected profit rate increases
investment, thereby shifting the investment demand curve rightward

Rahul Sunny answered 2 years ago

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