What do you understand by investment function?Explain the factors that influence the level of investment in the economy.
The investment function is a summary of the variables that influence the levels of aggregate investments. It can be formalized as follows: I=f(r,ΔY,q) where r is the real interest rate, Y the GDP and q is Tobin's q. The reason for investment being inversely related to the interest rate is simply because the interest rate is a measure of the opportunity cost of those resources. If the resources instead of financing the investment could be invested in financial assets, there is an opportunity cost of (1+r), where r is the interest rate. This implies higher investment spending with a lower interest rate. When GDP increases, the output and the capacity utilization increases. This results in an increase of capital investment.