Investment Demand Graphs

Real (r%) v. Nominal (i%)

what's the difference?

• Nominal is the observable rate of interest. Real subtracts our inflation (pi%) and is knot ex post facto

How do you compute the real interest rate (r%)? 

• r%=i% - pi%

What then, determines the cost of an investment decision?

• The real interest rate (r%)

Investment Demand Curve (ID)

what is the shape?

• Downward sloping

Why?

• When interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable 

Shifts in ID

cost of production:

• Lower costs shift ID ->
• Higher costs shifts ID<-

Business taxes:

• Lower bus taxes shift ID ->
• Higher <-

Technological change:

• New technology- >
• Lack of technological change <-

Stock of Capital:

• If an economy is low on capital, then ID ->
• If Econ has much capital then <-

Expectations:

• Positive expectation ->
• Negative expectations <-