Changes in investment expenditure (I)

Question 1

Investment expenditure

Answer 1

• Acquisition of new fixed capital assets (housing, machinery)
• Accumulation of inventory stock (raw materials, finished goods held by producer)

Question 2

Marginal efficiency of investment (MIE)

Answer 2

• Expected rate of investment return/capital good
• Firm will only invest if MEI>Current interest rate
• Low interest rate, less costly, more investments and vice versa

Question 3

Expectations of business

Answer 3

• Recession, pessimistic, falling expected investment rate, MEI curve shifts leftward, investment level falls
• Optimistic, rising expected investment rate, MEI curve shifts rightward, investment level rises

Question 4

Technological Progress

Answer 4

• Tech improvement, more efficient production, rising expected rate of investments returns, MEI shifts rightward

Question 5

Prices of inputs and availability of inputs

Answer 5

• Factors of production for firms

- Increase in labour costs, increase in labour saving investment (capital, tech), investment increases

Question 6

Government policies

Answer 6

• Increase in corporate tax, fall in post-tax profits (cannot retain as much earnings), fall in MEI
• Capital price subsidised, capital cheaper than labour, investment increases