Expected Rates of Return

1. How does business make investment decisions? Cost/Benefit Analysis
2. How does business determine the benefits? Expected rate of return
3. How does business count the cost? Interest costs

How does business determine the amount of investment they undertake?

1. Compare expected rate of return to interest cost
2. *If expected return > interest cost, invest
3. *If expected return < interest cost, then do not invest

Investment Demand Curve (ID)
What is the shape of it? Downward sloping
Why? When interest rates are higher, there are lower investments, and vice versa

Shifts in Investment Demand (ID)
Cost of production:
-Lower cost shifts ID to the right
-Higher cost shifts ID to the left

Business Taxes:
Lower business taxes makes ID to the right
Vice versa

Technological Change:
New tech shifts ID to the left
Lack of it shifts ID to the right

Stock of Capital:If an economy is low on capital, ID to the right
Vice versa

Expectations:
Positive expectations shift to the right
Vice versa