ECN 204 Lecture Notes - Lecture 8: Business Cycle, Autarky
4 Apr 2016
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Document Summary
Nothing to do with interest rate only the change in expectations. Its smaller in terms of dollars when compared to expenditure but plays an important role to explain the business cycle. Because it is much more sensitive that consumption expenditure. (see volatility of investment) Investment is very sensitive to the change in the economy. Very important expenditure component in the keynesian model. Any spending that people can delay they will delay. So investment is very discretionary and as a result they are very sensitive. A lot of investment boom happens because of innovation; randomness of innovation causes the irregularity of investment spending. Profit itself is more unpredictable than wages and this profits incentive to invest. So the decision to invest is also very up and down. Variability of expectations, certain environments can change expectations and sometimes people look at the stock market to see the confidence level of consumers or other markets because it gives indication.
