Investment tends to rise during economic expansions because during these periods, businesses are experiencing increased demand for their goods and services. As a result, they need to expand their production capacity to meet this increased demand. According to the accelerator theory of investment, businesses will increase their investment in capital goods when they expect an increase in demand for their products. This is because they need to increase their production capacity to meet the anticipated increase in demand.
On the other hand, during economic recessions, demand for goods and services tends to decrease, leading to excess capacity and lower profitability for businesses. According to the Keynesian theory of investment, during recessions, there is a lack of demand for goods and services, which leads to businesses reducing their investments in capital goods. This is because businesses are operating below their full capacity and do not need to expand their production capacity.
Overall, investment tends to rise during economic expansions because of increased demand for goods and services, while it falls during recessions due to decreased demand and excess capacity. These trends are explained by theories of investment such as the accelerator theory and the Keynesian theory.
10. The theories of investment suggest that investment is related to the business cycle.
Explain why investment rises during expansion and falls during recessions by referring
to the theories?�
1 answer