AP MacroeconomicsFinancial Sector & Loanable Funds
Investment Demand Curve
The investment demand curve shows the inverse relationship between the real interest rate and the quantity of investment spending firms want to undertake.
It slopes downward because a lower real interest rate reduces the cost of borrowing (and the opportunity cost of using funds), making more capital projects profitable, so the quantity of investment demanded rises. A change in the real interest rate causes a movement along the curve, while shift factors—business expectations, technology, taxes on investment, and the existing capital stock—move the whole curve. This curve links the loanable funds market to the investment component of aggregate demand. It explains why expansionary policy that lowers real rates stimulates investment and AD.