The investment function describes the relationship between planned investment expenditure and factors like national income and the interest rate. It explains how businesses decide to spend on new capital based on the current economic environment.

Common Models:

• Keynesian Model (I = Ī): Keynes believed investment is autonomous, meaning it is driven by business confidence, expectations, and interest rates rather than current income.
• Accelerator Model (I = v × ΔY): This model suggests investment is induced or triggered by changes in national income, where (v) is the capital-output ratio.

Key Features:

• Investment is the most volatile part of aggregate demand (AD), meaning it changes more frequently than consumer spending.
• It acts as an injection into the circular flow of the economy.
• In economic models, changes in investment shift the total aggregate demand curve, which directly impacts the national income equilibrium.
• High uncertainty or low business confidence can cause investment to drop, which reduces overall economic growth.