The Investment Schedule

Firms will undertake any investment project whose expected rate of return, r, exceeds the real rate of interest, i. If all possible investment projects are considered, then, total planned investment must be a declining function of the real rate of interest and an increasing function of the rate of return, all else constant--the lower the interest rate and the higher the rate of return, the greater the volume of projects that will qualify. In symbols, I_g = f(i, r) with D I_g/D i < 0 and D I_g/D r > 0. However, changes in Acquisition, Maintenance, and Operating Cost (AMOC), Business Taxes (BT), the rate of Technological Change (TC), the size of the Capital Stock (K) relative to sales, and Expectations (E) all have an impact on desired investment as well through their impact on the expected rate of return on investment projects. We could write r = r(AMOC, BT, TC, K, E). By hypothesis, D r/D AMOC < 0, D r/D BT < 0, D r/D TC > 0, D r/D K < 0, and D r/D E > 0. Significantly, GDP is not one of the factors that affects the expected rate of return. In symbols, D r/D GDP = 0.

Combining the two relationships, we discover that I_g = f(i, r(AMOC, BT, TC, K, E)), or more compactly, I_g = F(i, AMOC, BT, TC, K, E).

The "investment schedule" relates I_g to GDP. Because the expected rate of return on investment is independent of GDP, gross investment is also independent of the level of GDP. That is, D I_g/D GDP = 0, and the investment schedule plots as a horizontal line. However, the height of this line depends on the other factors listed above. An increase in the real rate of interest, an increase acquisition, maintenance, and operating cost, a decrease in the rate of technological change, an increase in the capital stock relative to sales, or a reduction in expectations will all reduce the amount of desired gross investment.