Investment Shock

Investment per head declines abruptly, since sales expectations worsen. This reduces aggregate demand and sales, in per capita terms, respectively. Accordingly the economy suffers from underemployment. Investment per head falls short of the required level, so capital per head diminishes. More precisely, sales drop by less than expected. Because of that investment and aggregate demand recover, in per capita terms, respectively. This in turn improves sales, hence the economy switches to overemployment. After some time, investment per head surpasses the critical level, thus replenishing capital per head. For the streamline see the phase diagram in figure 1. In due course, the economy gravitates towards a steady state. Ultimately both money wages and capital per head come back to their starting point.