2.2.3 Investment

Question 1

define investment?

Answer 1

when firms spend money on capital goods to increase their productive capacity.

Question 2

how does interest rates impact investment?

Answer 2

firms will finance investment in 2 ways either by borrowing money or invest using retained profits
-if interest rates are low then the cost of borrowing is low which means firms have a greater incentive to borrow money thus the marginal propensity to invest will increase.

Question 3

what does the notion of the hurdle state?

Answer 3

the lower the interest rates-the cheaper it becomes to borrow money-so more money to invest thus meeting the hurdle.

Question 4

how does business confidence impact investment

Answer 4

the expectation of the future profit and the expectation of the future demand in the economy.
-if it’s high going forward the businesses are more likely to invest-the marginal propensity to invest will be high to meet demand.

Question 5

how does corporation tax impact investment?

Answer 5

the retained profit left over can be used for investment if corporation tax is have been paid/low, the greater potential the business has to invest
-so if corporation tax is low then retained profits will be high

Question 6

how does spare capacity impact investment?

Answer 6

businesses already have enough spare capacity then there’s no need to invest in capital machinery e.g to build a new factory so the greater the spare capacity the less the marginal propensity to invest.

Question 7

how does the level of competition impact investment?

Answer 7

if competition is strong and lots of competitors are improving their tech- if they are spending more on capital machinery and using it for research and development, it will encourage investment so businesses will try to stay ahead by investing into tech.

Question 8

how does the price of capital machinery impact investment?

Answer 8

when the price of capital machinery is low-then investment will be less costly-the marginal propensity to invest will be high-investment will increase

Question 9

what does the accelerator effect suggest?

Answer 9

this is linked to investment-when there’s an increase in the rate of real GDP it will encourage businesses further.