Unit 3 Notes - Investment

·      What is an investment?

-       Money spent or expenditures on:

1.     New plants (factories)

2.     Capital Equipment (Machinery)

3.     Technology (Hardware & Software)

4.     New Homes

5.     Inventories (Goods sold by producers)

-       Expected Rates of Return

·      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 cost

·      If expected return is greater than interest cost, then invest

·      If expected return is less than interest cost, then do not invest

-       What then, determines the cost of an investment decision?

·      The Real Interest Rate (r%)

-       Investment Demand Curve (ID)

·      What is the shape of the investment demand curve?

-       Downward Sloping

·      Why?

-       When interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable

-       Conversely, there are few investments that yield rates of return, and many that yield low rates of return