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INFLATIONARY GAP, KEYNESIAN MODEL: The difference between equilibrium aggregate production achieved in the Keynesian model and full-employment aggregate production that occurs when equilibrium aggregate production is greater than full-employment aggregate production. An inflationary gap, also termed an expansionary gap, is associated with a business-cycle expansion. The prescribed Keynesian remedy for an inflationary gap is contractionary fiscal policy. This is one of two alternative output gaps that can occur when equilibrium generates production that differs from full employment. The other is a recessionary gap.

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SLOPE, INVESTMENT LINE:

The positive slope of the investment line is also termed the marginal propensity to invest (MPI). This slope is greater than zero but less than one, reflecting induced investment. The slope of the investment line affects the slope of the aggregate expenditures line and thus also affects the magnitude of the multiplier process.
Investment Line
Investment Line
The investment line, also termed propensity-to-invest line or investment function, shows the relation between investment expenditures by the business sector and the level of aggregate income or production. The income and production measures most commonly used are national income and gross domestic product.

A representative investment line is presented in the exhibit to the right. This red line, labeled I in the exhibit, is positively sloped, indicating that greater levels of income or production generate greater investment expenditures by the business sector. This positive relation indicates that the business sector is inclined to divert higher profits generated by an expanding economy to investment expenditures on capital goods.

The investment line graphically illustrates the investment-income relation for the business sector, which plays a key role in the aggregate expenditures line used in Keynesian economics to identify equilibrium income and production.

The slope of the investment line presented here is positive, but less than one. In fact, the slope of the investment line is numerically equal to the marginal propensity to invest. In this case the slope is equal to 0.1. The positive slope reflects induced investment expenditures--more income means more investment. Click the [Slope] button to illustrate.

To illustrate the equality between slope and the marginal propensity to invest, consider the equations for each. The slope of the investment line is specified as the "rise" over the "run." The rise is the change in investment measured on the vertical axis and the run is the change in income measured on the horizontal axis.

slope=rise
run
=change in investment
change in income
The marginal propensity to invest (MPI) is the incremental change in investment resulting from an incremental change in income.
MPI=change in investment
change in income
The slope of the investment line is the marginal propensity to invest, they are one and the same.

The positive slope of the investment line reflects induced investment, which is investment that depends on the level of income. If the aggregate economy has more income, then the business sector is induced to undertake additional investment expenditures. Of course, a drop in aggregate income induces the business sector to reduce expenditures.

<= SLOPE, GOVERNMENT PURCHASES LINESLOPE, LONG-RUN AGGREGATE SUPPLY CURVE =>


Recommended Citation:

SLOPE, INVESTMENT LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: December 7, 2022].


Check Out These Related Terms...

     | investment line | intercept, investment line | consumption line | slope, consumption line | slope, government purchases line | slope, net exports line | induced investment | autonomous investment | marginal propensity to invest |


Or For A Little Background...

     | investment | investment expenditures | gross private domestic investment | Keynesian economics | macroeconomics | business sector | national income | gross domestic product | determinants |


And For Further Study...

     | induced expenditures | autonomous expenditures | aggregate expenditures | aggregate expenditures line | derivation, consumption line | investment expenditures determinants | Keynesian model | Keynesian equilibrium | injections | injections-leakages model | aggregate demand | paradox of thrift | fiscal policy | multiplier |


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