Interest Rates & Investment Demand

Interest Rates & Investment Demand

ID = investment demand

Investment Demand

Money spent or expenditures on:

-New plants (factories)

-Capital equipment

-Technology (hardware & software)

-New homes

-Inventories (goods sold by producer)

 Expected Rates Of Return

How do businesses make investment decisions? cost/benefit analysis

How does business determine the benefits? expected rate of income

How does business count the cost? interest cost

How does business determine the amount of investment they under take? compare expected rate of return to interest costs 

if expected return > interest cost, then invest

if expected return < interest cost, then do not invest 

What determines cost of an investment decision? the real interest rate (r%)

Investment Demand Curve

Downward slope = lower rate = more people

Many interest rates are low