Investment

Question 1

Define Investment

Answer 1

spending on capital goods

Question 2

Explain the difference between net and gross investment

Answer 2

Gross investment is the total investment before deducting depreciation, while net investment is the gross investment minus depreciation

Question 3

Define interest rates

Answer 3

a cost of borrowing money, expressed as a percentage of the amount borrowed

Question 4

Explain the relationship between interest rates and level of investment

Answer 4

if the real interest rate increases, firms will demand less investment

Question 5

Explain the relationship between economic growth and level of investment

Answer 5

Investment thus contributes to economic growth

Question 6

Explain the relationship between business expectations/confidence and level of investment

Answer 6

If firms believe there will be an increase in the demand for their goods/services in the future then their marginal propensity to invest is likely to increase

Question 7

Explain what is meant by ‘animal spirits’

Answer 7

the ways that human emotion can drive financial decision-making in uncertain environments and volatile times

Question 8

Explain the relationship between demand for exports and level of investment

Answer 8

If the world economy is booming, demand for exports is likely to increase and therefore exporting firms’ investment is likely to increase to cope with this extra demand

Question 9

Explain how the Government might encourage investment

Answer 9

provide tax cuts or offer subsidies to specific industries to encourage growth and investment