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i=b0+b1y-b2i can i know how we get this formula for investment? and what each letter in...

i=b0+b1y-b2i

can i know how we get this formula for investment?

and what each letter in the formula represent?

thanks

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Answer #1

As we know, Investment may be autonomous and induced.

Autonomous Investment = If the investment does not depend either on income/output or the rate of interest, then such investment is called autonomous investment.

Induced Investment = Investment that is dependent on the level of income or on the rate of interest is called induced investment.

Here 2 cases arise, Y shows the Income

1st if the I on the right side is the investment =

2nd if the I on the right side is Rate of Interest =

Investment is inversely related to the level of interest rate

Investment is directly related to Income.

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