The lower the rate of interest, the larger is the firm’s demand for
investment. The lower the interest rate, the higher is the present value of
any given stream of MRPs and hence the more capital that the firm will
wish to use.
Anything that increases the future stream of MRPs produced by the
capital leads the firm to demand more units of capital at any interest rate
—the investment demand curve shifts to I.
What would cause a firm’s investment demand curve to shift? First,
suppose the firm’s expectations about future demand for its product
improve. This optimism leads the firm to expect an increase in the future
stream of MRPs produced by capital. With higher expected MRPs, the
firm is prepared to purchase more units of capital (at any interest rate).
The firm’s investment demand curve thus shifts to the right. Second,
suppose an improvement in technology increases the future stream of
MRPs. Again, the higher future MRPs lead the firm to purchase more
units of capital at any interest rate—a rightward shift in the firm’s
investment demand curve.
Any event that increases the expected future stream of MRPs leads to an increase in the firm’s
investment demand.'