Investment function

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The investment function is a summary of the variables that influence the levels of aggregate investments. It can be formalized as follows:

I=f(r,ΔY,q)

- + +                                                                                                                  

where r is the real interest rate, Y the GDP and q is Tobin's q. The signs under the variables simply tell us if the variable influences investment in a positive or negative way (for instance, if real interest rates were to rise, investments would correspondingly fall).

The reason for

is represented when the market puts a high value of the installed capital and buys stocks in the firm for a higher price. The firm can then raise more resources per share issued and increase their investments.

References

• Burda, Wyplosz (2005): Macroeconomics: A European Text, Fourth Edition, Oxford University Press