Macroeconomics

Residential investment

includes the new housing that people buy to live in

and that landlords buy to rent out. Inventory investment includes those goods

that businesses put aside in storage, including materials and supplies, work in

process, and finished goods. Figure 18-1 plots total investment and its three com-

ponents in the United States between 1970 and 2008. You can see that all types

of investment usually fall during recessions, which are shown as shaded areas in

the figure.

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In this chapter we build models of each type of investment to explain these

fluctuations. The models will shed light on the following questions:

■

Why is investment negatively related to the interest rate?

■

What causes the investment function to shift?

■

Why does investment rise during booms and fall during recessions?

At the end of the chapter, we return to these questions and summarize the

answers that the models offer.