February 16, 2017

 Interest rates and Investment demand notes 

 What is investment?

• Money spent or expenditures on 
• New plants (factories) 
• Capital equipment (machinery)
• Technology ( hardware and software )
• New homes 
• Inventories (  good sold by producer ) 

 What is expected rate of return?

•  How does business make investment decisions? 
• Cost/benefit analysis 
• How does businesses determine the benefits? 
• Expected rate of return
• How does businesses count the cost?
• Interest costs 
• Determine 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 

r% = I% - π%

r = Real

I = Nominal

π = Inflation

What determines the cost of an investment decision?

• The real interest rate (r%)

What is the Investment Demand Curve?

• What is the shape of the investment demand curve?
• Downward sloping
• Why?
• When Interest increases, fewer investments are profitable; When Interest rates decreases, more investments are profitable

What is the shift in Investment Demand?

• Cost of production
•  Business Taxes
• Technological change
• Stock of Capital
• Expectations