Autonomous investment
Topic: Aggregate Demand, Income Determination and the Multiplier · NCERT: Class 12, Ch 4 "Determination of Income and Employment"
Meaning
Autonomous investment is investment that does not depend on the level of income. It is written as Ī. In the simple model, planned investment is a fixed positive constant, I = Ī, so on a graph it is a horizontal line. In reality, investment depends on the interest rate, which is the cost of borrowed funds (a higher rate means less investment), and on how easily credit is available. Autonomous consumption stays fairly stable, but Ī rises and falls from time to time. So changes in investment drive most booms and slumps.
Example
With C = 40 + 0.8Y, a rise in Ī from 10 to 20 lifts equilibrium income from 250 to 300. In India, easier bank credit and lower interest rates can raise private investment by firms.
Don't confuse with
- Induced investment: this is investment that rises with income. Ī is assumed to stay the same whatever the level of income.