2.2.3 Investment (I)

Question 1

What is investment?

Answer 1

Expenditure undertaken by firms on capital goods

Question 2

What is net investment?

Answer 2

Investment undertaken to increase the productive capacity of a firm

Question 3

What is gross investment

Answer 3

Investment undertaken to replace capital goods that have been worn out (depreciation)

Question 4

How does the rate of economic growth affect investment?

Answer 4

If the economy is growing, and is expected to in the future, firms will exploit opportunity for profit by investing.

Question 5

How does business expectation and confidence affect investment?

Answer 5

The better the expectation and confidence, the more business’ will be willing to invest

Question 6

How does Keynes ‘animal spirits’ affect investment?

Answer 6

When a recession occurs, business’ are less confident so invest less, deepening the recession

Question 7

How does the government affect investment?

Answer 7

Governments may provide incentives for firms to invest, for example tax reliefs. It may also direct and regulate funding to different parts on the country to encourage private investment

Question 8

How do interest rates affect investment?

Answer 8

High interest rates may deter firms from borrowing to invest, as the cost of paying it back is high. High interest rates lead to little investment from borrowing