Investment Expenditures and Income

Investment expenditures sometimes are regarded as varying directly with the level of output and real income and directly with changes in the level of output and real income as well as inversely with the interest rate.

Making investment expenditures a positive function of Y produces a number of interesting implications. It aggravates the fluctuations in Y which attend real and monetary disturbances, and it increases the strength of both monetary and fiscal ease. If the income-induced effect on investment expenditures is very strong, the IS curve can slope positively, possibly by enough to produce unstable equilibriums in the IS-LM model. Empirical results seem to rule out the investment expenditures and Y relationship as a source of unstable equilibriums, however.

Making investment expenditures a positive function of 4Y-that is, introducing an accelerator effect an, when equilibrium is disturbed, produce complicated adjustment paths, oscillatory as well as smooth, and unstable as well as stable. The rigid accelerator mechanism is subject to a number of qualifications, but economic researchers have found models with flexible versions of the accelerator effect to be useful predictors of investment expenditures.