Ch. 14 - Investment Flashcards
What is investment?
Spending on new capital assets that increase the economy’s productive capacity
What is depreciation?
The decline in capital due to wear & tear, obsolescence, accidental, damage, & aging
What are the 3 types of investment?
- Business Investment
- Inventories
- Housing Investment
What is business investment?
Spending by businesses on new capital assets
What is housing investment?
Spending on building & improving houses or apartments
What is future value?
The amount that your money will grow into
FV = PV(1+r)^t
What is present value?
The amount of money that you would need to invest today in order to produce an equivalent benefit in the future
PV = FV/(1+r)^t
What is discounting?
Converting future values into their equivalent present values
What is a depreciation rate?
The proportion of an investment’s remaining productive capacity you lose each year due to depreciation
What is the rational rule for investors?
Pursue an investment opportunity if the present value of future revenues exceeds the up-front cost
((Next year’s revenue)/(r+d)) > C
What is the user cost of capital?
The extra cost associated with using one more machine next year
UCC = (r+d) X C
What is an investment line?
The line that shows how the quantity of investment increases as the real interest rate falls
What are 4 factors that shift the investment line?
- Technological Advances
- Expectations about the reward of future revenues
- Corporate Taxes
- Lending standards & cash reserves
What is the market for loanable funds?
The market for the funds used to buy, rent, or build capital
What is the neutral real interest rate?
The interest rate that operates when the economy is in neutral-producing neither above or below its potential
What causes shifts in the supply of loanable funds?
- Changes in personal saving rates
- The budget surplus (or deficit) shifts government saving
- Global shocks shift foreign savings
What is personal saving?
Saving by households of whatever money they don’t either spend or pay as taxes
What is crowding out?
The decline in private spending - and particularly investment - that follows from a rise in government spending
What is foreign saving?
Saving that comes from foreigners lending to Canadians
