Unit 3: Investment Demand

What is investments?

• Money spent or expenditures on: 
• New plants (Factories)
• Capital equipment (machinery)
• Technology (hardware)
•  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 returns 
• 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

Real Interest Rate (r%) vs. Nominal Interest Rate (i%)

• What then determine the cost of an investment decisions? 
• 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 many that yield low rates of return.