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?
: Investment Spending
: National Interest rate
What changes causes the investment function to shift dramatically?
Business expectations of future profits
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
Study for test 2