Keynes thought that the behavior of the economy in the short run was influenced by what he called "animal spirits." By this he meant that business people sometimes felt good about the economy, and carried out lots of investment, and at other times felt

bad about the economy, and so cut back on their investment spending. Explain how such fluctuations in investment would lead to fluctuations in real GDP and prices.

Fluctuations in investment cause the aggregate demand curve to shift. If the aggregate demand curve shifts to the right, real GDP and the price level rise. If the aggregate demand curve shifts to the left, real GDP and the price level fall. So erratic movements in investment can cause fluctuations in output.