INVESTMENT

Question 1

investment

Answer 1

= spending on new capital assets that increase the economy’s productive capacity

Question 2

gross investment (formula)

Answer 2

= net investment + depreciation

Question 3

3 types of investment

Answer 3

1. business – IP, equipment, business structures
2. housing construction (and renovation)
3. changes in inventory

Question 4

discounting

Answer 4

• how much money in the future is worth today)
  PV = FV/(1+r)t

Question 5

compounding

Answer 5

• helps you calculate how money grows over time when you leave it to accumulate interest in the bank
  FV = PV*(1+r)t
  r for nominal GDP is inflation + growth rate

Question 6

Market for Loanable Funds

Answer 6

• savers supply funds, investors demand them
  price of loanable funds = real interest rate
• investment demand negatively correlated with real interest rates

Question 7

neutral real interest rate

Answer 7

the rate that ensures that output is equal to potential

Question 8

crowding out

Answer 8

the decline in private investment due to a larger budget deficit (when the government borrows, it leads to higher real interest rates, so there is less money for the firms)