March 20, 2018
Interest Rates and Investment Demand
- Investment:
- Money spent or expenditures on:
- New plants (factories)
- Capital Equipment (Machinery)
- Technology (hardware and software)
- New Homes
- 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 > interest rate, then invest
- If expected return < interest rate, then do not invest
- Real (r %) v. Nominal (i %)
- Nominal is observable rate of interest. real subtracts out inflation (𝝅 %) and is only known ex post factor
- How do you compare the real investment decision?
- r % = i % - 𝝅 %
- What then, determines the cost on 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 high rates of return, and may the yield low rates of return.
Your notes really hit the points of what is investment demand and interest rate. Howver, I would like to add the structure of your notes could be improved. Other than that, I love the color you added since it really makes information pop out so you don't miss it!
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