Interest Rate and Investment Demand

• Investment
• Money spent or expenditures
• New plants (factories)
• Capital equipment
• Technology
• New Homes
• Inventories (goods sold by producers)
• Expected Rates of Return
• How does business make investment desicisions?
• Cost/Benefit
• How does business determine the benefits?
• Expected Rate of Return
• How does business count the cost?
• Interest costs
• How does business determine the amount of investment they undertake?
• Compare expected rate of return to interest cost
• If expected return > interest cost, then invest
• If expected return < interest cost, don't invest
• Real (r%) v. Nominal (i%)
• Difference
• Nominal is the observable rate of interest. Real subtracts out inflation and is only known ex post facto.
• How do you compute the real interest rate (r%)/

• r% = i% -