February 16, 2017

Investment - money spent or expenditures

• New plants (factories), Capital Equipment (machinery), Technology (hardware or software), New Homes, Inventories

Expected Rates of Return

• How does business make investment decisions?
• Cost/Benefit analysis
• How does this determine the benefits?
• Expected rate of return
• How does business count the cost?
• Interest costs
• How does business determine the amount of investment they undertake?
• Compare expected rate of return to interest cost
• If expected return > interest cost, then invest
• If expected return < interest cost, then do not invest

Real (r%) vs Nominal (i%)

• How do you compute the real interest rate?
• r% = i% - 𝛑%
• What then, determines the cost of an investment decision?
• The real interest rate

Investment Demand Curve (ID)

• What is the shape of the Investment Demand curve?
• Downward sloping
• Why?
• When investment 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
• Exchange