spending of 500 can be expressed as
Answers
Just as a consumption function shows the relationship between real GDP (or national income) and consumption levels, the investment function shows the relationship between real GDP and investment levels. When businesses make decisions about whether to build a new factory or to place an order for new computer equipment, their decision is forward-looking, based on expected rates of return, and the interest rate at which they can borrow for the investment expenditure. Investment decisions do not depend primarily on the level of GDP in the current year. Thus, the investment function can be drawn as a horizontal line, at a fixed level of expenditure. The slope of the investment function is zero, indicating no relationship between GDP and investment. Figure 1 shows an investment function where the level of investment is, for the sake of concreteness, set at the specific level of 500.