Investment Overview

Money spent or expenditures on:

• new plants (factories)
• capital equipment (machinery) 
• technology (hard & soft)
• new homes
• inventories (goods sold by producers)

Expected Rates of Return:

• How does business make investment decisions?

           - Cost/Benefit Analysis

• How does business determine 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 return to interest
              - return > cost = invest
              - return < cost = do not invest 

Real (r%) v. Nominal (i%): 

           nominal is observable rate if interest, real subtracts inflation (π%) and is known as ex post facto

• How do you compute the real interest rate?

         - r% = i% - π%

• What determines the cost of investment?

         - real interest rate (r%)

Investment Demand Curve (ID):

• What is the shape?

         - downward sloping

• Why?

         - when interest is high, fewer investments are profitable; when interest rates are low,              more investments are profitable