Interest Rates and Investment Demands(2/16)

Interest Rates and Investment Demands(2/16)

Investment - essentially expenditures

• new plants (factories)
• Capital equipment (machinery)
• Tech (hardware&software)
• New Homes
• Inventories (goods sold by producers)

Expected Rate of Return

• These thins help firms make decisions, determine whether to invest, the cost of investment and so on...
• Cost/Benefit Analysis
• Expected Rate of Return
• interest costs
• comparing the expected rate of return to interest costs
• if expected rate > interest cost, invest
• if expected rate < interest cost,  don't invest%) - inflation (π%)
• the cost of investment is determined by r% as it is adjusted for inflation

Investment Demand Curve

• downward sloping due to:
• increasing interest rate = fwr investments are profitable
• decreasing interest rate = more investments are profitable

Shifts in ID

• costs of production
• business taxes
• tech changes
• stock of capital
• expectation