Investment Demand -

Investment Demand - 

• What is Investment?
• money spent on expenditures on:
• new plants (factories)
• capital equipment (machinery)
• technology (hardware and software)
• new homes
• inventory (goods sold by producers)
• Expected Rates of Return
• How does business make investment decisions
• cost-benefit analysis
• How does businesses determine benefits?
• expected rate of return
• How does business make the cost?
• interest costs
• How does businesses determine the 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, do not invest
• What determines the cost of the investment decision?
• the real interest rate (r%)
• Interest Demand Curve
• What is the demand of the investment demand curve?
• downward sloping
• Why?
• when interest rates are high, fewer investments are profitable; when interest rates are low, most investments are profitable
• conversely, there are few investments that yield high rates of return and many that yield low rates of return