What is the investment demand function?

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The investment demand function is used to describe when an investment will be made. J. M. Keynes was one of the first to describe this function in a formalized manner. He described the investment demand function as the relationship between the marginal efficiency of capital and the volume of investment.

The marginal efficiency of capital is the rate of return on an investment above its cost. This value is based on the expected sale value of the assets deducting operating costs and the cost of buying the assets. The marginal efficiency of capital must be positive for an investment to be worthwhile. In addition, the marginal efficiency of capital can be compared for different assets to provide a benchmark of which asset is expected to have a better return considering its price and expected future value.

Graphing the marginal efficiency of capital and volume of investment can be used to find the investment demand function. This function can vary for different assets. This type of measure is useful in determining when to invest in a given asset.

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There is not one set investment demand function in the sense that there is one Pythagorean theorem or one equation for the money multiplier. Instead, the investment demand function is something that can change. It is simply the relationship between the interest rate and the amount of investment that is demanded.

This curve can shift for a variety of reasons, and that means that the function can change when those factors change. In other words, we know that there is a relationship between the interest rate and the amount of investment, but we do not know exactly what that relationship is, because it varies as other factors vary.

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