What determines consumption and investment?

Consumption considers all the expenditures on goods and services that households make. For this reason, consumption counts disposable income, which is the income minus the taxes paid by householders.

A higher level of disposable income will result in more consumption, which means that households will earn more after paying taxes.

In the case of investment, this considers all the items purchased for being used in the future. What determines the investment is the interest rate. For making an investment profitable, the return must be greater than the costs. In this situation, if the interest rate falls, it will result in more profitable investments because the profitability (income received after the production of goods and services) will exceed the costs (the payments for having lent funds).

$\textbf{Consumption}$ is all purchases made by households, which contributes to around two-thirds of the GDP.

Therefore, consumption depends on disposable income, which is the amount of income after all taxes have been paid, since people can only spend what is left after paying taxes on their income.

If the disposable income is higher consumption rises, if people earn more, they have more after taxes, they will generally spend more.

To summarise, $\textbf{disposable income positively determines consumption}$.

$\textbf{Investments}$ are made both by firms and households, in the form of capital, or new housing for example.

For an investment to be profitable, its return must exceed its costs, therefore the real interest rate must be low, as it measures the cost of funds.

If the real interest rate is high, it is more costly to invest, while if the real interest rate is low the demand for investment increases.

To summarise, $\textbf{the real interest rate negatively determines investment}$.