The second major component of private spending is investment. Investment plays two roles in macroeconomics. First. because it is a large and volatile component of spending. investment often leads to changes in aggregate demand and affects the business cycle. In addition. investment leads to capital accumulation. Adding to the stock of buildings and equipment increases the nation’s potential output and promotes economic growth in the long run.

Thus investment plays a dual role. affecting short run output through its impact on aggregate demand and influencing long-run output growth through the impact of capital formation on potential output and aggregate supply.