Shifts in the Investment Demand Curve

We have seen how interest rates affect the level of investment, Investment is affected by other forces as
we. For example, an increase in the GDP will shift the investment demand curve out, as shown in Figure
~2-10(a) on the next page.

Finally note the importance of expectations. What if investors become optimistic about e-commerce? They might project rapid growth rates for companies like AOL- Time Warner or Yahoo! and set aside traditional precepts that business schools teach about investment. As a result, the demand for investment in software and factories for Internet companies might temporarily increase sharply. Figure 22-1O (c) displays how a bout of business optimism would shift out the investment demand schedule. The opposite case, of pessimism about profits in corrupt Russia. would explain why Western firms have invested warily in that economy. These are but two examples of how expectations can have powerful effects on investment.

Meter learning about the factors affecting investment, you will not be surprised to discover that investment
is the most volatile component of spending, Investment behaves unpredictably because it depends on such uncertain factors as the success or failure of new and untried products, changes in tax rates and interest rates, ‘political attitudes and approaches to stabilizing the. economy, and similar changeable events of economic life. In virtually rookery winnings cycle, investment fluctuations have.