2.2.3 - investment

Question 1

Define investment

Answer 1

addition to the capital stock of the economy (capital is i the form of machinery, factories, office and stokcs of materials used to produce other goods and services)

Question 2

What are the criteria for investment

Answer 2

investment only takes place if real products are made as a result of the investment

Question 3

Define gross investment

Answer 3

Total investment calculated by adding new investment to replacement investmen

Question 4

Define net investment

Answer 4

Total investment minus replacement investment

Question 5

Define physical capital

Answer 5

investment in factories etc (this one is used in AD!!!!)

Question 6

Define Human capital

Answer 6

Human capital is a measure of individuals’ skills, knowledge, abilities, social attributes, personalities and health attributes. These factors enable individuals to work, and therefore produce something of economic value

Question 7

Define capital consumption/depreciation

Answer 7

value of capital stock depreciates over time as it is used up or wear out

Question 8

Define replacment investment

Answer 8

The purchase of capital goods by firms to replace existing, worn out capital. It does not add to the total capital stock of an economy

Question 9

State the 7 influences on investment

Answer 9

o the rate of economic growth
o business expectations and confidence
o Keynes and ‘animal spirits’
o demand for exports
o interest rates
o access to credit
o the influence of government and regulations

Question 10

Define animal spirits

Answer 10

Animal spirits refers to the state of confidence or pessimism held by consumers and businesses

Question 11

State how business confidence nfluence investment

Answer 11

If business are optimistic, spend more on investment so ad shifts to the right, but if they become pessimistic, they spend less on investment so AD curve shifts leftwards

Question 12

State how changes in interest rates influence investment

Answer 12

Increase in interest rates raise cost of borrowing so firms reduce investment spending financed by borrowing and AD curve shifsts to the left vice versa
- decrease in interest rates results in a fall in cost of borrowing so more investment spending financed by borrowing, AD curve shifts to the right

Question 13

State how access to credit influence investment

Answer 13

Small businesses have less access to credit so they cannot borrow easily to finance investments,
access to credit = The willingness and ability of financial institutions to lend funds to producers and consumers

Question 14

State keynes input on animal spirits

Answer 14

Keynes recognised that noy all investment decisions are based purely on reason and rational thinking and that human emotion, intuition and gut instinct are also important factors - These factors are called ANIMAL SPIRITS

Question 15

State how government regulation influence investment

Answer 15

1) Gov incentives like subsidies or tax reductions encoruage firms to invest becomes they’ll hva emore funds available to do so
2) relaxing of gov regulations might reduce a firms costs and make it more likely to invest

Question 16

State how rates of economic growth influence investement

Answer 16

• if there is slow rate of economic growth or periods of economic instability, there tends to be quite a lot of risk involved so less investment is made then
• In a growing economy, there will be higher levels of
  investment as businesses would be more confident about their investments and the higher demand would lead to a higher return rate on the investment.