- Investment
- Money spend or expenditures on:
- New plants (factories)
- Capital equipment (machinery)
- Technology (hardware & software)
- New Homes
- Inventories (goods sold by producers)
- Expected Rates of Return
- How does business make investment decisions?
- Cost/benefit analysis
- How does business determine the benefits?
- Expected rate of return
- How does business count the cost?
- Interest cost
- How does business determine the amount of investment they undertake?
- Compare expected rate of return to interest cost
- If expected return > interest cost = Investment
- If expected return < interest cost = Don't invest
- Real & Nominal
- r% (real) = i% (nominal) - Ļ% (inflation)
- What then determines the cost of an investment decision?
- The real interest rate
- Investment Demand Curve
- What is the shape of investment demand curve?
- Downward sloping
- Why?
- When interest rates are high, fewer investments are profitable.
- When interest rates are low, more investments are profitable.
- Shifts in Investment Demand (ID)
- Cost of production
- Business taxes
- Technological change
- Stock of capital
- Expectations
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