# Investment function

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{{Technical|date=November 2014}}

The '''investment function''' is a summary of the variables that influence the levels of aggregate investments. It can be formalized as follows:

I=f(r,ΔY,q)
 - + +                                                                                                                  
where r is the real interest rate, Y the GDP and q is Tobin's q. The signs under the variables simply tell us if the variable influences investment in a positive or negative way (for instance, if real interest rates were to rise, investments would correspondingly fall).

The reason for [investment](/source/investment) being inversely related to the [Interest rate](/source/Interest_rate) is simply because the interest rate is a measure of the [opportunity cost](/source/opportunity_cost) of those resources. If the resources instead of financing the investment could be invested in financial assets, there is an opportunity cost of (1+r), where r is the interest rate. This implies higher investment spending with a lower interest rate. When [GDP](/source/GDP) increases, the output and the capacity utilization increases. This results in an increase of capital investment. At last, a higher [Tobins q](/source/Tobins_q) is represented when the market puts a high value of the installed capital and buys stocks in the firm for a higher price. The firm can then raise more resources per share issued and increase their investments.

==References==
{{reflist}}
*Burda, Wyplosz (2005): Macroeconomics: A European Text, Fourth Edition, Oxford University Press

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Category:Investment
Category:Macroeconomic indicators

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Adapted from the Wikipedia article [Investment function](https://en.wikipedia.org/wiki/Investment_function) by Wikipedia contributors ([contributor history](https://en.wikipedia.org/wiki/Investment_function?action=history)). Available under [Creative Commons Attribution-ShareAlike 4.0 International](https://creativecommons.org/licenses/by-sa/4.0/). Changes may have been made.