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why investment is constant in AD schedule Related: Point of aggregate...
Aggregate Demant supply
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why investment is constant in AD schedule Related: Point of aggregate...
Why Investment is Constant in AD Schedule?


The aggregate demand (AD) curve shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government. One of the components of AD is investment, which is a function of interest rates and expected returns on investment. However, in the short run, investment is assumed to be constant, and this has important implications for the shape of the AD curve.


Investment Determinants


Investment is the purchase of new capital goods, such as machinery, equipment, and buildings, that are used to produce goods and services. The level of investment depends on several factors:



  • Interest rates: Higher interest rates reduce the quantity of investment demanded because they increase the cost of borrowing.

  • Expected returns on investment: If firms expect higher profits from investment, they will be more likely to invest.

  • Business confidence: If firms are optimistic about the future, they may be more willing to invest.

  • Technology: New technologies may create opportunities for investment.

  • Government policy: Tax incentives or subsidies may encourage investment.



Short-Run Assumption


In the short run, it is assumed that investment is constant because it takes time for firms to adjust their investment plans in response to changes in interest rates or expected returns. In addition, some investment projects may be already underway or committed, and cannot be easily cancelled or postponed.


Implications for the AD Curve


If investment is assumed to be constant, then any change in the price level will not affect the quantity of investment demanded. Therefore, the AD curve will be relatively steep, because changes in the price level will have a large impact on the quantity of real GDP demanded.


However, in the long run, investment can adjust to changes in interest rates and expected returns, and the AD curve can become flatter. This is because changes in the price level will affect the quantity of money demanded, which in turn will affect interest rates, and therefore investment.


Therefore, the short-run assumption of constant investment helps to explain the steep slope of the AD curve in the short run, while the long-run adjustment of investment helps to explain the flatter slope of the AD curve in the long run.
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Read the following passage and answer on the basis of the same : The subject-matter of economics is divided into two major branches—Microeconomics and Macroeconomics. Microeconomics studies the economic behaviour of individual economic units and individual economic variables, whereas macroeconomics deals with the functioning of the economy as a whole. Macroeconomics dealswith the broad economic aggregates or bigger issues, such as full employment, unemployment, full capacity, under capacity production, inflation or deflation, etc. Macroeconomics is concerned with the theory of national income, employment, aggregate consumption, savings and investment, general price level, economic growth, etc. Whereas, microeconomics is concerned with the theory of product pricing, factor pricing and consumer behaviour, etc.Positive economics is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause and effect behavioural relationships and includes the development and testing of economic theories. Positive economics is objective and facts based. Whereas normative economics is a part of economics that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be. Normative economics is subjective and value based.For example, the statement, “government-provided healthcare increases public expenditures” is a positive economic statement and the statement, “government should provide basic healthcare to all citizens” is a normative economic statement.Assertion (

Read the report given below and answer the questions that follow:In an economy the Aggregate Demand is determined by consumption, Government Expenditure and Net Exports in the economy. This is affected by the Savings and Investment in the economy. The Multiplier, that is investment multiplier, which is influenced by the ratio of total consumption and total income, regulates the flow of money in the economy influencing the Aggregate Demand and Supply. Any change in any of the factors leads to a big change in the economy’s equilibrium as a whole. It is to be kept in mind that the economy needs to be in equilibrium condition. When savings is less than the investments the aggregate demand is more than the aggregate supply, and vice versa.What happens when the Investment is lesser than Savings?

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