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Draw the diagram showing the investment function. Show how the level of investment would change if...

Draw the diagram showing the investment function. Show how the level of investment would change if the real interest rate increased.

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We consider that the planned investment is the function of the real interest rate. The real interest rate we mean that the opportunity cost of the funds used to finance the investment. So the investment demand is the function of the real interest rate. The investment demand curve is downward sloping from left to right. The fall in the rate of interest will increase the level of investment and vice versa. In the diagram, the initial investment is given as I and the corresponding rate of interest is r. Suppose the rate of interest fall from r to r2 and the investment is increases to I to I1 and vice versa.

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