INTEREST RATE AND INVESTMENT DEMAND

Investment

Money spend or expenditures on:

-New plants (factories)

-Capital equipment (machinery)

-Technology ( hardware and software)

-New homes

-Inventories (goods sold by producers)

Investment decisions

-cost / benefit analysis 

Determination of benefits

-expected rate of return

Count the cost

-interest costs

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

Difference is the observable rate kf interest. Rate subtracts out inflation (€%)

R% = i% - €% 

R = real interest rate

i = nominal interest rate

Pie= inflation rate

What determines the cost of an investment decision

-the real interest rate (r%)

Investment demand curve

Shape of investment demand curve

-downward sloping

Why?

-when interest rate are high, fewer investment are profitable; when interest rates are low, more investment are profitable

Shifts in investment demand (ID)

-cost of production

.higher cost shift ID <

.Lower cost shift ID >

-business taxes

.Higher taxes shift ID <

.lower taxes shift ID >

-technological change

.new tech shift ID >

.lack of tech shift ID <

-Stock of capital 

.If low capital then ID >

.If high on capital then ID <

-Expectations

.If positive then ID  >

.If Negative then ID <