While autonomous investment expenditures are unaffected by income and are held constant for the construction of the investment line, they are not absolutely constant, they do change. Autonomous investment is affected by investment expenditures determinants, such as interest rates, expectations, technology, and capital prices. Changes in these and other determinants cause changes in autonomous investment, which shift the investment line as well as the aggregate expenditures line and disrupt whatever equilibrium might exist.

Investment expenditures are commonly assumed to be totally autonomous in the introductory analysis of Keynesian economics. That is, any induced investment that might realistically exist is ignored. Doing so not only simplifies the analysis, but also places the focus on how and why autonomous investment changes, and how such changes affect the macroeconomy. More sophisticated, and realistic, analysis then includes induced investment.

Autonomous: An Equation

I

=

e

+

fY

The two key parameters that characterize this investment equation are slope and intercept. Autonomous investment is indicated by the intercept of the investment equation. Induced investment is then indicated by the slope.

• An Autonomous Intercept: The intercept of the investment equation (e) measures the amount of investment undertaken if income is zero. If income is zero, then investment is $e. The intercept is generally assumed and empirically documented to be positive (0 < e). It is conceptually identified as autonomous investment.


• An Induced Slope: The slope of the investment equation (f) measures the change in investment resulting from a change in income. If income changes by $1, then investment changes by $f. This slope is generally assumed and empirically documented to be greater than zero, but less than one (0 < f < 1). It is conceptually identified as induced investment and the marginal propensity to invest (MPI).

Autonomous: A Line

Investment Line

For sake of comparison, an induced investment line would have a positive slope. And because investment expenditures are only modestly induced by income and production, an induced investment line has a slight slope. A click of the [Induced A Little] button illustrates induced investment (with a comparison to the autonomous investment line).

Investment Expenditures Determinants

These determinants, similar to those for other relations in the study of economics, cause a change in the underlying investment-income relation. From a graphical perspective, these determinants cause the investment line to shift, which effectively means that the intercept of this line changes. More generally, these determinants cause a change in autonomous investment.

A few of the more important investment expenditures determinants are:

• Interest Rates: Higher interest rates increase the cost of borrowing. This discourages the borrowing that the business sector uses to finance investment expenditures for capital goods. As such, autonomous investment decreases. Lower interest rates work in the opposite manner.


• Expectations: If the business firms expect an improving economy in the future then they are more likely to increase autonomous investment, even if income is unchanged or falling in the present. The result is an increase in autonomous investment. Expectations of a declining economy are then likely to cause a reduction in autonomous investment.


• Capital Assets: An increase in the existing stock of business capital goods means that further purchases are not needed. Why building another factory, when a brand new one was just completed? This causes a decrease in autonomous investment. A reduction in the stock of physical wealth has the opposite effect.


• Technology: An advance in technology invariably triggers the need for a wide range of capital goods to produce, distribute, and integrate the resulting goods. This causes an increase in investment expenditures, once again, even if current income is constant or declining. A drop off in technology, although less likely, then causes a decrease in investment.


• Capital Prices: Like any good, the demand for capital is governed by the law of demand. A lower price of capital leads to an increase in the quantity demanded of capital. This is another way of saying that investment expenditures for capital increases. An increase in the capital prices then causes a decrease in the quantity demanded and a decline in autonomous investment.

Other Autonomous Expenditures

• Autonomous consumption is key factor in the analysis of business-cycle instability in large part because consumption is the largest of the four expenditures. While business cycle ups and downs are usually attributable to investment, more than a few can be traced back to autonomous changes in consumption expenditures. While these autonomous expenditures are unrelated to income, they are influenced by other factors, such as interest rates, consumer confidence, and wealth.


• Although some degree of government purchases are induced by income, the government sector is also inclined to change spending in response to factors other than income. Autonomous government purchases result from these other influences and are perhaps most important in the analysis of fiscal policy designed to correct business cycle ups and downs.


• Autonomous net exports, the difference between exports and imports, are based on global economic conditions, especially economic activity in other countries. These expenditures by the foreign sector also depend on such things as currency exchange rates, trade agreements, wars and conflicts, or global politics.