Investment and Aggregate Demand

Some of the factors that influence total investment spending in the UK economy are considered in this short video.

What are the main factors influencing planned investment spending by businesses?

• Actual & expected demand for goods & services
• Expected profits and business taxes
• Interest rates + availability of business finance
• Business confidence i.e. animal spirits

Key exam point:

Government can lift investment by lowering corporation tax or offering other tax incentives as part of their fiscal policy.

Key exam point:

Planned investment tends to rise when firms expect rising demand and have limited spare capacity to supply goods and services.

What are animal spirits and why are they important?

John Maynard Keynes coined the notion of animal spirits which refers to a mix of confidence, trust, mood and expectations.

When confidence is low, individuals save more, businesses save more too and, because demand and profits are lower than expected, they cut back on production and perhaps postpone or cancel capital investment projects.

Higher saving and reduced investment both reduce demand and incomes in the circular flow causing an economic contraction – this is called the “paradox of thrift”.