Investment

Question 1

What is investment?

Answer 1

It is the addition of capital stock that is used to produce other goods and services

Question 2

When does investment take place in the eyes of an economist?

Answer 2

For an economist investment only takes place if real products are created. For example:
Putting money into bank account would be saving ; the bank buying a computer to handle ur account would be investment.
Buying shares in a new cop may would be saving ; buying machinery to set up a company would be investment

Question 3

What is depreciation?

Answer 3

The decrease in the value of stock?

Question 4

What causes depreciation?

Answer 4

Caused by the wear if stock over time as it is used

Question 5

What is gross investment?

Answer 5

Measures investment before depreciation

Question 6

What is net investment?

Answer 6

Gross investment after depreciation

Question 7

What are the 2 different types of capital?

Answer 7

Human capital
Physical capital

Question 8

What is investment in human capital?

Answer 8

Investment in the education and training of workers

Question 9

What is investment in physical capital?

Answer 9

Investment in factories and machinery etc

Question 10

What is capital stock?

Answer 10

The total amount of capital goods in a firm, industry or economy

Question 11

How can investment be financed?

Answer 11

Firms borrowing money from banks
Retained profit

Question 12

How does the rate of interest affect levels of investment (borrowing)?

Answer 12

The higher the rate of interest, the lower the profit from any investment will be (Ceteris paribus).
A rise in interest rates will therefore reduce the number of profitable investment projects and so firms will invest less
The lower the rate of interest, the more investment projects will be profitable and so there will be more investment

Question 13

What is retained profit?

Answer 13

Profits that firms keep and do not distribute to their owners

Question 14

How does the rate of interest affect levels of investment (retained profit)?

Answer 14

The higher the rate of interest that banks offer on savings, the more attractive it is for firms to save money rather than invest in physical capital
The lower the rate if interest, the greater incentive for firms to spend their savings and invest

Question 15

What are the determinants of investment?

Answer 15

Changes in interest rates
Changes in business confidence
Changes in technology
Changes in business taxes
The level of corporate indebtedness
Legal changes

Question 16

How does business confidence affect investment?

Answer 16

If businesses are optimistic, they spend more on investment, and the AD curve shifts to the right
If businesses are pessimistic, they spend less on investment, and the AD curve shifts to the left

Question 17

How do interest rates affect investment?

Answer 17

Increases in interest rates raise the cost of borrowing, and this forces businesses to reduce investment spending financed by borrowing, and therefore the AD curve shifts to the left
Decreases in interest rates mean businesses can now finance their investment spending by borrowing at a lower cost, and the AD curve shifts to the right

Question 18

How does technology affect investment?

Answer 18

Improvements in technology stimulate investment spending, therefore causing increases in AD and shifting the curve to the right

Question 19

How do business taxes affect investment?

Answer 19

Increasing taxes causes for investment spending to decrease as less money is available and the AD curve will shift to the left
Deceasing taxes causes for investment spending to increase as more money is available and the AD curve to shift to the right

Question 20

How does the level of corporate indebtedness affect investment

Answer 20

If businesses have high levels of debt, they would be less inclined to make investments and would be more inclined to pay off their debt and the AD curve shifts to the left
A low level of debt leads to more investment and a shift to the right on the AD curve

Question 21

How do legal changes affect investment?

Answer 21

For example, small businesses often don’t have access to credit, meaning they can’t borrow easily to finance investments.
Many developing and transitioning economies don’t have the necessary laws to secure property rights.
AD curve would shift to the right if you can pattern this