Interests Rates and Investment Demand
Investment: Money spent or expenditures on
- New Plants (Factories)
- Capital Equipment (Machinery)
- Technology (Hardware and Software)
- New Homes
- Inventories
Expected Rates of Return
- Businesses make investment decisions: Cost/Benefit Analysis
- Businesses Determine the benefits: Expected Rate of Return
- Businesses count the cost: Interests Costs
- 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, then do not invest
Real (r%) vs. Nominal (i%)
- Real Interest Rate (r%)= i%-pi%
Investment Demand Curve (ID)
- Downward Sloping
- Because when interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable.
Shifts in Investment Demand
- Cost of production
- Businesses Taxes
- Technological Change
- Stock of Capital
- Expectations
- Businesses make investment decisions: Cost/Benefit Analysis
- Businesses Determine the benefits: Expected Rate of Return
- Businesses count the cost: Interests Costs
- 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, then do not invest
Real (r%) vs. Nominal (i%)
- Real Interest Rate (r%)= i%-pi%
Investment Demand Curve (ID)
- Downward Sloping
- Because when interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable.
Shifts in Investment Demand
- Cost of production
- Businesses Taxes
- Technological Change
- Stock of Capital
- Expectations
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