Induced Investment Curve

Investment that would respond to a change in national income or in the rate of interest is called induced investment. Induced investment is zero at oy 1 income.

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I 1 i 1 is the investment curve which shows induced invest ment at various levels of income.

Induced investment curve. The induced investment is the increasing function of profit. So the induced investment function is upward sloping. Ipip is the induced investment curve.

It is income elastic. The ratio l y will be called the average propensity to invest and dl dy is called the marginal propensity to invest. An increase in thriftiness means an upward shift of the.

Induced investment is that investment which is undertaken as a result of change in the level of income. Induced investment takes place either due to change in the level of income or due to change in the rate of interest. Iv induced investment curve is positively sloped but autonomous investment curve is horizontal straight line parallel to x axis according to keynes during short period firms plan to invest the.

The profit expectation of firms depend upon aggregate demand for goods and services in the economy. Induced investment is income elastic because of short term profits possibly due to increased demand the investment curve slop ing sharply from the horizontal income axis. Autonomous investment is defined as income in elastic investment.

Shift in the investment curve. The slope of the investment equation f measures the change in investment resulting from a change in income. Ss is the initial savings function which cuts the induced investment function ipip at e.

If firm expect profit they are induced to invest. Investment that is dependent on the level of income or on the rate of interest is called induced investment. If income changes by 1 then investment changes by f.

In the ultimate analysis induced investment is a function of in come i e i f y. It increases or de creases with the rise or fall in income as shown in figure 1. As income increase from oy 1 to oy 2 the level of induced investment increases from y 1 e 1 to y 2 e 2 so the larger the income of the community the higher will be the induced investment.

It depends on the rate of change of gnp gross national product. This slope is generally assumed and empirically documented to be greater than zero but less than one 0 f 1. The level of aggregate demand itself depends upon the level of national income.

Ip stands for induced private investment. In income is measured along the x axis and investment along y axis. Iii induced investment is determined by consideration of profit whereas autonomous investment is determined by consideration of social welfare.

3 10 shows that as national income rises from oy 0 to 0y 1 induced investment increases from oi 0 to oi 1. In this figure curve i represent the induced investment schedule at various levels of income. If investment is a function of the level of income then it can be written as i l y.

Thus investment that is income elastic is called induced investment. It represents induced investment curve. The curve for autonomous investment i given in the below graph is a horizontal line parallel to x axis which indicates that the amount of investment is same at each level of income.

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