INTEREST RATES & INVESTMENT DEMAND [2/17]

investment - money spent or expenditures on 

• new plants (factories)
• capital equipment (machinery)
• technology (hard drives and software)
• new homes
• inventories (goods sold by producers)

expected rates of returns:
how does business make investment decisions?
cost/benefit analysis
how does business determine the benefits?
expected rate of returns
how does business count cost?
interest cost
how does business determine amount of investment they undertake?

• returns > interest cost ; invest
• returns < interest cost ; not invest

real (r%) v. nominal (i%)
what's the difference?
nominal is observable rate of interest. real subtracts out inflation(π%) & is only known expost facto.

how can you compute the real interest rate (r%)?
r% = i% - π%

what then, determines cost of an investment decision?
real interest rate (r%)

investment demand curve (ID):
shape: downward slop
why? interest rates are high, fewer people investments are profitable, when interest rates are low, more investments.

shifts in investment demands:
cost of production:

• lower = ID right
• higher = ID left

business taxes:

• lower = ID right
• higher = ID left

technological changes:

• new tech = ID right
• lack of tech change = ID left

stock of capital:

• econ low on capital = ID right
• econ much on capital = ID left

expectation:

• positive = ID right
• negative = ID left

LRAS:
always vertical @ full employment
represents a point on econ's PPC
doesn't change as price level changes

LRAS shifts w/ same determinates as PPC.

• resources
• technology 
• econ. growth