The Economy’s Demand for Investment
The economy’s overall demand for investment is determined from the
demands of individual firms. Thus, there is a negative relationship
between the interest rate and the desired aggregate investment for the
same reasons that the negative relationship exists for any individual firm.
The economy’s demand for investment can therefore be represented by a
downward-sloping curve like the one in Figure 15-3.
The economy’s investment demand curve shifts for the same reasons that
individual firms’ demand curves shift. Anything that increases the future
stream of MRPs of capital leads to a rightward shift in the investment
demand curve. Technological improvements are a key reason for such
increases in the demand for investment. (We will say more about this
later.)