Investment and Aggregate Demand

Readers Question: What are the effects of increased investment on aggregate demand in the short term and the long term.

Investment is a component of AD. AD+ C+I+G+A-M. I think, Investment spending takes about 15% of AD; it is not as significant as Consumer spending which is 66%.

If Investment increases, then ceteris paribus, AD will increase. However, it depends on circumstances. e.g. in present situation with falling house prices and lower consumer spendin, increased investment may be insufficient.

In the long term, higher investment may increase productive capacity and increase Aggregate supply. Therefore, you could argue, invesment enables a more sustainable increase in AD.

People often ask whether increased AD leads to an increase in Real GDP. Often the suggested answer is yes in the short term, but not in the long term.

See also:

• Causes of Economic Growth
• Discuss whether demand side policies reduce unemployment