Investment

Investment
-Investment: 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 / Benefit Analysis
-How does business 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 DON'T invest

Real (r%) v. Nominal (i%) Interest rates
-What's the difference?
        *Nominal is the observable rate of interest
        *Real subtracts out inflation (π%) and is only known ex post factor (laws adopted after an act is committed making it illegal although it was legal when done, or increases the penalty for a crime after it is committed)
-How do you compute Real interest rate (r%)?
        *r% = i% - π% 
-What determines the cost of an investment decision?
        *Real interest rate (r%)

Investment Demand Curve (ID)
-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 (ID)
-Cost of Production
        *lower costs ID ->
-Business Taxes
        *lower taxes ID ->
-Technological Change
        *new technology ID ->
-Stocks of Capital
        *low on capital ID ->
-Expectations
        *positive expectations ID ->