- new plants (factories)
- capital equipment (machinery)
- tech. (hardware and software)
- new homes
- inventories (goods sold by producers) ** Walmart has "just-in-time (best) system
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 amount of investment they undertake? →compare expected rate of return to interest cost **if expected return>interest rate, invest**if expected return<interest rate, DO NOT invest
Real (r%) v. Nominal (i%)
-Difference: nominal is observable rate of interest. Real subtracts out inflation (π%) aka "ex post facto"
-Compute real interest rate (r%)=i%-π%
-What determines cost of an investment decision? → the real interest rate (r%)
Investment Demand Curve (ID)
-downward sloping curve
-Why?
- when ir (interest rates) are ↑, fewer investments are profitable; when ir are ↓, more investments are profitable
- conversely, few investments yield ↑ rates of return, and many yield ↓ rates of return
Shifts in ID
- cost of production
- business taxes
- technological change
- stock of capital
- expectations
Investment Demand Graph:
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