MACRO - LS3 - Aggregate Demand (Part 4 & 5)

Question 1

Investment

Answer 1

The addition to the capital stock of the economy used to produce other goods/services

Question 2

Gross investment

Answer 2

Total Investment value before depreciation

the total amount of spending on capital goods without taking into account the depreciation of the existing capital stock

Question 3

Net investment

Answer 3

Gross investment minus value of depreciation

Net investment takes into account the effects of depreciation on the capital stock. If it is positive, productive potential rises. If it decreases, productive potential falls

Question 4

Physical capital

Answer 4

Investing in factories/infrastructure

Question 5

Investment in human capital

Answer 5

Education/training

Question 6

Determinants of investment

Answer 6

• rate of economic growth - more investment as more confident about them, higher demand, high return rate in investment - shift to right
• business expectations/confidence - ‘animal spirits’ - when they are confident about further and expect growth, investment will increase to prepare for future
• demand for exports - if economy booming, exports increase, causing more investment to cope with extra demand
• interest rates - high rates means borrowing is expensive, less likely to invest unless very confident. If rates too high then unprofitable investment , higher rates, less profitable projects, also will save money instead of using retained profit to invest but when rates low use that profit to invest
• access to credit - if there is a high risk, investment will be lower as it means less access to credit and rates are higher
• influence of government and regulations - can encourage investment through policy such as tax breaks. Also if highly regulated economy then time and cost increase so less investment e.g. planning regulations
  -corporate indebtedness - if businesses have high level of debt, less likely to invest as need to pay off debt

Question 7

Animal spirits

Answer 7

• term coined by Keynes
• mix of confidence, trust, mood and expectations
• how owners/managers feel about whether investment will be profitable
• difficult to measure

Question 8

Capital stock

Answer 8

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

Question 9

Depreciation

Answer 9

The gradual decrease in the economic value of the capital stock either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question.