Investment Shock

Abstract

In the current section, K* = αE/r will be substituted for K* = αY/r, where E denotes expected sales. Initially, the economy rests in the long-run equilibrium. Particularly, expected sales conform with actual sales E = Y. Against this background, an investment shock comes about: Sales expectations worsen exogenously. Then, after some time, expected sales will again agree with actual sales endogenously E = Y. In full analogy to section 3, the equation of the IS curve can be established:

$$ r = \frac{{\alpha \lambda E}}{{\beta \delta \mu Y + \lambda K - \mu {\rm K}}} $$

(1)