Unit 3: What is Invetment

2/21/17

Investment

• Investment- Money spent or expenditures on...
  

-New plants (factories)

-capital equipment (machinery)

-technology (hardware and software)

-new homes

-inventory

•  Expected rates of return

*How do businesses make investment decisions?

-cost/benefits analysis

*How do businesses determine the benefits?

-expected rates of return

*How do businesses determine the amount of investments they should undertake?

-Compare expected rate of return too interest of cost

-If the expected rate of return is greater than interest cost = investment
- if the expected rate of return is less than the interest cost = no investment
-r%( real investment)= 1%(nominal rate)-π(inflation)

Investment Demand Curve (ID)

• The investment demand curve is downwards slopping because when the interest rates are high fewer investments are profitable; when interior rates are low more investments are profitable.
• Shifts in AD ...

- Cost of production

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- Technological change 

- Stock capital 

-Business taxes