What is Investment?

• Investment is money spent or expenditures on:
• New Plants (factories)
• Capital Equipment's (machinery)
• Technology (hardware & software)
• New Homes
• Inventory (goods sold by producer)
• ex. Maytag

• Expected Rate of Returns: 
• How does a business make investment decisions?
• Cost/Benefit Analysis
• How does a business determine the benefits?
• Expected rate of returns 
• How does a business count the cost?
• Interest cost
• How does a business determine the amount of investment they undertake?
• compare expected rate of return to interest cost.
• If expected rate return > interest cost, then invest
• If expected rate return < interest cost, then DO NOT invest

REAL(r%)  VS.  NOMINAL(i %)

• What then determines the cost of investment? The real interest rate. (r%)
• r% = i% - π%

Investment Demand Curve (ID)

• Shape of demand curve? Downward slopping
• Why? When interest rates are increasing, fewer investments are profitable. When interest rates are low, more investments are profitable. 
• There are few investments that yield high rates of return and many that yield low rates of return.