Procrustean Art of Backtracking: “Downward-Sloping Investment (3)”

 

As regards the gross domestic investment (I for investment in national-income accounting), we quote the following from Chapter 3 of N. Gregory Mankiw, Macroeconomics:

Investment depends on the real interest rate because the interest rate is the cost of borrowing. The investment function slopes downward: when the interest rises, fewer investment projects are profitable. 

Yes, we’ve got it: I= I(r), where ΔI/ Δr< 0.

 

After eight chapters, eight diagrams in the Chapter, so many convenient hypotheses, so many equations and “so many words,” N. Gregory Mankiw, “for the sake of” suggesting the IS curve, effectively verifies:

             Y= Y(r), where ΔY/ Δr< 0. Or, “The IS function slopes downward.”

The only regret therein is no reference at all to the gross national saving (S).

 

Most probably, such an IS curve is no news at all to the rest of us who have already learned:

             Y= C+ I, and

             C= a∙Y +b, where “a” as constant stands for the aggregate cross-sectional MPC.

             Therefore, Y= (a∙Y +b)+ I, or Y= [1/ (1-a)]∙[ I(r)+ b]= Y(r), where ΔY/ Δr< 0.

Oh, that’s no more complex than the Three R’s!

 

Questions. What’s the difference between the “I” curve and the IS curve? Is there a place for the poor “S” in the sun? Is “cross-sectional” a synonym of “over-time”? Or, is “stability” of the economy a cross-sectional issue?

Among the rest of us, in fine. The division between “I” and C is made as per GAAP, never “the interest rate” of whatever meaning.

 

Ever since the time began, there have been two types of masters.

             The one explains complex things simply; Sir Isaac Newton is a good example.

             The other explains simple things complexly; there are “so many” masters including Lords,                  Sirs and NoL’s out there in Cambridge macroeconomics.