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## PowerPoint Slideshow about ' Investment Demand' - portia

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### Investment Demand

The Curve and the Determinants

The Investment Demand Curve

- This curve shows the amount of investment forthcoming at each real interest rate.
- The main determinants of investment are the expected rate of return and the real interest rate.
- The marginal-benefit, marginal-cost rule is applied to determine which investment projects should be undertaken.
- There is an inverse relationship between the interest rate (i) and dollar quantity of investment demanded.

Shift vs. Movement Along the Curve

- Generally, any factor that leads businesses to alter their expected rates of return(r) causes investment demand to shift.
- If the interest rate changes (i), it is a movement along the curve.

Acquisition, Maintenance and Operating costs.

- When these costs increase, expected rate of return from prospective investment decreases.
- This causes the investment demand curve to shift to the left.
- When costs fall, expected rate of return from prospective investment increases.
- This causes the investment demand curve to shift to the right.

Business Taxes

- An increase in business taxes results in decreased expected profitability of investments (r).
- This causes the investment demand curve to shift to the left.
- A decrease in business taxes results in an increase of expected profitability.
- This causes the investment demand curve to shift to the right.

Technological Change

- The development of new products and improvements in existing products stimulates investment.
- This causes the investment demand curve to shift to the right.

Stock of Capital Goods on Hand.

- When firms are overstocked with capital, there is no incentive to invest.
- This causes investment to decline and the curve shifts to the left.
- When firms are running low on capital goods (depreciation), firms tend to increase investment.
- This shifts the ID curve to the right.

Expectations.

- If businesses expect future sales, future operating costs, and future profitability to be poor, ID shifts left.
- If businesses expect more profits in the future, then they will increase their investment.
- The expected rate of return (r) on capital investment depends on the firm’s expectations of the future.

Test Preparation

- Numbers 1, 3, and 7 on Pages 222 and 223.

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