I_d

Definition

I_d, or investment demand, refers to the amount of investment spending that businesses and individuals are willing to undertake at different levels of the interest rate, holding all other factors constant. It represents the relationship between the quantity of investment and the interest rate in the economy.

5 Must Know Facts For Your Next Test

1. I_d is a key component of the national saving and investment identity, which states that national saving must be equal to national investment.
2. The investment demand curve slopes downward, indicating that as the interest rate falls, the quantity of investment demanded increases, and vice versa.
3. The position and slope of the investment demand curve are influenced by factors such as the marginal efficiency of investment, technological progress, and expectations about the future.
4. Investment demand is a derived demand, meaning it is dependent on the demand for the goods and services that the investment is intended to produce.
5. Changes in investment demand can have significant impacts on the overall level of economic activity and employment in the economy.

Review Questions

• Explain how the investment demand (I_d) curve is related to the national saving and investment identity.
  • The investment demand (I_d) curve is a key component of the national saving and investment identity, which states that total national saving must be equal to total national investment in the economy. The position and slope of the I_d curve reflect the relationship between the quantity of investment and the interest rate, and changes in investment demand can have significant impacts on the overall level of economic activity and employment in the economy.
• Describe the factors that influence the position and slope of the investment demand (I_d) curve.
  • The position and slope of the investment demand (I_d) curve are influenced by several factors, including the marginal efficiency of investment (MEI), technological progress, and expectations about the future. The MEI represents the profitability of investment projects, and as it increases, the I_d curve shifts to the right. Technological progress can also increase the productivity of capital, leading to a rightward shift of the I_d curve. Additionally, positive expectations about the future can encourage businesses and individuals to undertake more investment, again shifting the I_d curve to the right.
• Analyze the role of investment demand (I_d) in the determination of the equilibrium interest rate and the level of national investment in the economy.
  • The investment demand (I_d) curve, along with the supply of loanable funds (S), determines the equilibrium interest rate and the level of national investment in the economy. In the loanable funds market, the intersection of the I_d curve and the S curve determines the equilibrium interest rate. This interest rate, in turn, determines the quantity of investment that businesses and individuals are willing to undertake, which must be equal to the national saving according to the national saving and investment identity. Changes in investment demand, driven by factors such as the marginal efficiency of investment, technological progress, and expectations, can shift the I_d curve and lead to changes in the equilibrium interest rate and the level of national investment.

Related terms

National Saving and Investment Identity: The national saving and investment identity is an accounting identity that states that total national saving must be equal to total national investment in the economy.

Marginal Efficiency of Investment (MEI): The marginal efficiency of investment (MEI) is the expected rate of return on an additional unit of investment. It represents the profitability of investment projects.

Loanable Funds Market: The loanable funds market is the market where savers (suppliers of loanable funds) and borrowers (demanders of loanable funds) come together to determine the interest rate and the quantity of loanable funds traded.