•It is money spent or expenditures on:
New plants (factories)
Capital equipment (machinery)
Technology (hardware and software)
New homes
Inventories(goods sold by producers)
Expected rates of return
How does business make investment decisions?
Cost and 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 ending is investment they undertake?
Compare expected rate of return to interest cost
•If expected return> interest cost, then invest
•If expected return< interest cost m, then do invest
Real VS nominal
What's the difference?
Nominal is the observable rate of interest. Real subtracts out inflation and is only known ex post facto.
How do you compute the real interest rate?
R%= i% - inflation
What then determines the cost of an investment decision?
The real interest rate (r%)
What is the shape of the 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
Cost of production
Lower costs shift ID➡️
Higher cost in production <
Business taxes
Lower business taxes shift ID➡️
Higher business taxes shift ID<
Technological change
New technology shifts ID➡️
Lack of technological change shift ID<
Stock of Capital
If an economy is low in capital then ID➡️
If an economy has much capital then ID<
Expectations
Positive expectations ➡️
Negative<
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