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Purchases by firms of new buildings, equipment, and additions to inventory
The additions to capital and/or inventory that are planned by firms
The amount if investment spending that actually takes place
The amount a sum will be worth at a given date, if its allowed to earn interest at some expected rate
Present Value of a future sum
The amount of money needed today to yield a particular sum at some point in the future
Present value formula
PV = FV/(I+r) to the nth power
Present value < Cost
Not a good investment
What does Present value explain?
Why investment spending tends to fall (all else being equal) when the interest rate rises
What is represented on the X and Y axis of the investment function?
- X axis: Investment Spending
- Y axis: National Interest rate
What changes causes the investment function to shift dramatically?
- Interest rates
- Business expectations of future profits
- "Animal spirits..."
What is equilibrium in relation to the investment function?
- Price of whats offered for sale = Price of what people want to buy
- Agg. Supply = Agg. Demand
- Y = C + Ip + G