3- Investment

Question 1

Influences on investment

Answer 1

• Rate of economic growth
• Business confidence and expectation (animal spirits)
• Demand for exports
• Interest rates
• Influence of government regulation
• Access to credit
• Retained profits
• Technological change

Question 2

How does the rate of economic growth affect the level of investment?

Answer 2

Higher the demand, the higher the rate of return on investment.

Question 3

How does business confidence and expectation (animal spirits) affect the level of investment?

Answer 3

Higher investment when businesses are confident about future growth.

Question 4

How do interest rates affect the level of investment?

Answer 4

• Most investment done through borrowing so firms need to be confident about getting a return.
• Higher interest rates, increases the opportunity cost of using retained profits to invest.

Question 5

Marginal efficiency of capital (MEC)

Answer 5

Inverse relationship between interest rate and level of investment.

Question 6

How does the influence of government regulation affect the level of investment?

Answer 6

• Government can offer tax breaks or grants to encourage investment.
• Higher regulation, less investment as regulation costs money and time for businesses.

Question 7

How does access to credit affect the level of investment?

Answer 7

• In recessions it is hard to access the finance needed to invest.

Question 8

How does the level of retained profits affect the level of investment?

Answer 8

Higher retained profits, higher investment.

Question 9

How does the level of technological change affect the level of investment?

Answer 9

• Better technology, speeds up production, increases profitability, increases chance of success of investment.
• Businesses need to invest to keep up with new technology.