Unit 3: Interest Rates and Investment Demand 2/21/17

Investment

Money spent 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 Rates
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 v. Nominal

Real % = Nominal % - Inflation%
What determines the cost of an investment decision?
- Real Interest Rate (r%)

Investment Demand Curve (ID)

Shape of the ID curve?
- Downward Sloping

Shifts in Investment Demand (ID)

- Cost of Production
- Business Taxes
- Technological Changes
- Stock of Capital
- Expectations

LINK:
https://courses.byui.edu/econ_151/presentations/Lesson_06.htm