Aggregate Demand Worksheet Component of AD Direction of New AD curve Change Consumers respond to high levels of debt by reducing their purchases of durable goods. Reduced business confidence leads to a reduction in investment spending. Government spending increases with no increase in taxes. Survey shows consumer confidence jumps. Stock market collapses; investors lose billions. Productivity rises for fourth straight year. New tariffs on imported goods lead to a trade war that reduces exports by more than it reduces imports. Investment Demand Investment spending consists of spending on new buildings, machinery, plants, and equipment. Investment spending is a part of aggregate expenditures in the economy. Any increase in investment spending will necessarily increase aggregate expenditures (GDP) and AD. Decisions about investment spending are based on a comparison of marginal cost and marginal benefit. If a firm expects a particular project to yield a greater benefit than cost, it will undertake it. An important cost associated with investment spending is the interest expense. Firms must either borrow money to engage in an investment project or use their own money. In either case, the interest rate determines the cost of the investment project. If the firm borrows money to invest, it must pay the interest rate to borrow. If the firm uses its own money, then it gives up the interest it could have earned by loaning that money to someone else. That is, the interest rate measures the opportunity cost if a firm invests with its own money. 2