96 ❯ Step 4. Review the Knowledge You Need to Score High
• With the exception of taxes and transfers, when the consumption function shifts
upward, the saving function shifts downward.
• With the exception of taxes and transfers, when the consumption function shifts
downward, the saving function shifts upward.
• When taxes increase (or transfers decrease), both consumption and saving functions shift
downward.
• When taxes decrease (or transfers increase), both consumption and saving functions shift
upward.
8.2 Investment
Main Topics: Decision to Invest, Investment Demand, Investment and GDP, Market for
Loanable Funds
Investment is the other source of private domestic spending. We spend a little time exam-
ining why firms increase or decrease investment, build the investment demand curve, and
then introduce the market for loanable funds.
Decision to Invest
The decision of a firm to spend money on new machinery or construction is simply a deci-
sion based upon marginal benefits and marginal costs. The marginal benefit of an investment
Disposable
Income
Consumption
CHigh
CLow
C 0
Disposable
Income
Saving
0
S 0
SLow
SHigh
Figure 8.3
Figure 8.4
KEY IDEA