Investment

Investment demand /Interest rate

• money spent on expenditures
• New plants
• capital equipment
• technology
• 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 cost

- How does business determine the amount of investment they undertake

• compare expected rate of return to interest rate
• if expected> interest cost, Invest
• If expected< interest cost, don't invest

Real (r%) vs Nominal (i%) interest rate

-Nominal - observable rate of interest.

-Real - subtracts out inflation(π %) and is only known ex post facto.

• Real interest rate (r %)
• r % = i % - π %

downward sloping- when interest rates are high fewer investment are profitable,when interest rates are low more investments are profitable.

Shifts in investment demand

- cost of production l

  lower cost -->, higher cost <--

-Business tax

-technological changes

-stock of capital

-Expectation