ABSTRACT
Consider a rate reduction from io to i 1. Figure 4.1 shows the investment function, Equation (3.9), with the interest rate on the vertical axis and investment on the horizontal axis. The position of the investment function depends on the level of income. With a lower interest rate and no change in GDP, investment would increase along the curve labeled J(Yo). But, as we will see, this increase in investment generates a multiplier effect that raises the level of income and shifts the investment function out to the position labeled I (Y1).
