*(a+I)
The next component of autonomous expenditure we want to consider is investment. In the last chapter, investment was treated as given and constant. But we know that, in fact, investment is not constant -- it changes from time to time, and in fact investment is "volatile," which means that the changes can be large in proportion to the amount invested, and can be sudden and unpredictable. Let's see what happens in the simple Keynesian model when investment changes.
In particular, let's see what happens when investment drops. We will use the numerical example from the last chapter, with the consumption function
C = 500 + 0.7*Y
but assume that investment drops from 1000 to 500.
, and since the MPC is 0.7, that is , or 3.333....
Using this information, the new equilibrium will be
Y = *(a+I)
That is
Y = 3.333*(500+500)
which in turn is
Y = 3333.33
We see that, when investment drops by 500 in our numerical example, equilibrium income drops by 1666.67.
This is the same result as the one we got when autonomous consumption dropped by 500. That's not surprising, of course, since the multiplier is the same.
The Graphical View
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