Investment rates and demand

• Investment is money spent or expenditures on:
• New plants (factories)
• Capital equipment (machinery)
• Technology (hardware & software)
• New homes
• Inventories (goods sold by producers)

Expected Rates of Return

• How does business make investment decisions? Cost/Benefits 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 cost, then invest
• If expected return < interest cost, then do not invest

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

• What's the difference? 
• Nominal is the observable rate of interest. Real subtracts out inflation (𝜋%) and is only known ex post factor.
• How do you compute the real interest rate?
• r% = i% - 𝜋%
• What then, determines the cost of an investment decision?
• The real interest rate r%

Investment Demand Curve (ID)

• What is the shape of the investment demand curve? Downward sloping
• This occurs because:
• 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.