Investment
money spent or expenditures on
New plants (factory)
Capital Equipment (machinary Technolagy New homes Inventories
Expected rate of returns
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 costs; if expected return > interest cost, then invest; if expected return < interest cost, then don't invest)
Formula:
Real interest rate (r%) = nominal interest rate (i%) - inflation (𝝅%)
What determines cost of investment decision?
(the real interest rate)
Shifts in Investment Demand
cost of production
business taxestechnological changestock of capital
expectations
VIDEO BELOW WILL HELP WITH THIS LESSON
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