Question

to analysis investment demand falls, then the multiplier and equilibrium output are how to change.

Answer 1

The most volatile part of expenditure is investment. The level of output in an economy is determined by the level of aggregate expenditure. The output generates income and all the income generated out of output is used to buy goods and services. Some are saved, hoarded, and taxed away. In every period there is not adequate demand to according to the supply. The inadequate investment causes the demand to lag behind supply. Hence the inventories piled up, producers cut back some production and workers are laid off. This all happened due to investment fluctuations, thus investment is the most volatile component of expenditure.

The planned investment is the investment by the firm on fixed capital. This depends largely on the perception of the producers about economy. If the producers think that the economy will flourish in near future they invest in fixed capital which increases their productivity.

The unplanned inventories are the difference between aggregate expenditure and output in the economy. If there are positive unplanned inventories the aggregate expenditure is less than the output, and vice versa. If the unplanned inventories are positive the producers faces excess supply and cut back their production. This decreases the real GDP in the economy. On the other hand when unplanned inventories are negative the aggregate expenditure is greater than the real GDP and the producers will face excess demand. The producers increase their production and real GDP increases in the economy.

A decrease in planned investment implied that the producers’ are pessimist about the economy and think that there could be an decreasing demand in the future. Now if the planned investment decreases it decrease the productivity of the economy. Thus the total output hence real GDP decreases in the economy.