Question

Compared to Consumption and Savings, Investment is relatively unstable. Discuss the reasoning behind this. Be sure to include Consumption, Savings and the factors contributing why Investment is so unstable.

Answer 1

Answer - Consumption and savings are kind of more stable than investment because the consumption cannot be put off. Some amount of consumption always takes place in the economy. If the consumption will take place , savings will definately be affected from it. More stable consumption leads to more stable savings. But on the other hand , investment is more sensitive to the economic conditions. Unlike consumption , investment can be put off. Hence when interest rates are about to rise , or investore are pessimistic , they reduce purchase of machine etc. This greater sensitivity of investment makes it unstable as compared to consumption and savings.