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fixed investmentany INVESTMENT in plant, machinery, equipment and other durable CAPITAL GOODS. Fixed investment in the provision of social products like roads, hospitals and schools is undertaken by central and local government as part of government expenditure. Fixed investment in plant, equipment and machinery in the private sector will be influenced by the expected returns on such investments and the cost of capital needed to finance planned investments.
Investment is a component of AGGREGATE DEMAND and so affects the level of economic activity in the short run, while fixed investment serves to add to the economic INFRASTRUCTURE and raises POTENTIAL GROSS NATIONAL PRODUCT over the longer term.
In the short run, expected returns from an investment in plant will depend upon business confidence about sales prospects and therefore plant utilization. The volatility of business EXPECTATIONS means that planned levels of investment can vary significantly over time, leading to large changes in the demand for capital goods (see ACCELERATOR), i.e. large fluctuations in the investment component of aggregate demand leading to larger fluctuations in output and employment through the MULTIPLIER effect. See BUSINESS CYCLE, INVENTORY INVESTMENT, MARGINAL EFFICIENCY OF CAPITAL/INVESTMENT.