Shifts in AD curve (I)

Question 1

Define investment

Answer 1

• expenditures by firms on capital goods (e.g. factory buildings and machinery)
• additions to stock of raw materials, semi-finished goods and unsold finished goods (inventories)

Question 2

Changes in investment level reasons

Answer 2

a. Rate of interest
b. Cost and efficiency of capital equipment (technology)
c. Gov policies such as taxation or regulation
d. Business expectations
e. Level of corporate indebtedness

Question 3

Rate of interest

Answer 3

1. interest rate rise
2. cost of borrowing funds to finance investment spending higher
3. fall in I , AD fall `

Question 4

Cost and efficiency of capital equipment

Answer 4

1. increased efficiency to machines (tech improvements) /cost of capital equipment falls
2. increased output can be produced with same amt of capital
3. increased returns frm investment
4. firms also need to make new purchases on more efficient machines as new tech leads to better quality capital goods, firms present stock become out of date, new investment necessary

Question 5

Gov policies such as taxation or regulation

Answer 5

1. corporate income tax reduced
2. post tax profit rise, greater investment
3. vice versa (less incentive for firms to invest)
4. trade off: gov less revenue

Question 6

Business expectations

Answer 6

1. businessmen more optimistic abt future economic conditions
2. expect revenue frm investment projects to rise
3. business confidence rise due to strong economic growth
4. demand for capital goods increase, I increases, AD rightward shift

Question 7

Level of indebtedness

Answer 7

1. drop in lvl of corporate indebtedness
2. lesser funds channelled to debt servicing
3. more funds for investment, AD rise, rightward shift