Interest rates and Investment Demand

Investment:Money spent on expendentures on
  -New plants (factories)
  -Capital equipment(machinery)
  -Technology(hardware and software)
  -New homes
  -Inventories(goods sold by producers)

Expected rates of return
-How does business make investment decisions?
  -Cost/benefit analysis
-How does business determine the benefits
  -expected rate of return
-How does business count the cost?
  -interest rates
-How does business determine the amount of investment they undertake?
  -compare expected rate of return to interest cost
  -if expected return＞ interest cost, than invest
  -If expected return＜ interest cost, then don't invest

Real (r%) v. Nominal(i%)
Real is adjusted for inflation
nominal is current

-nominal is the observable rate of interest.
-real subtracts out inflation (n%) and is only known as ex post facto.

Formula for real interest rate (r%)

r%= i% - ℼ%

what determines cost of investment decision
-real interest rate (r%)

Investment Demand Curve (ID)
What is the shape of investment demand curve?
  -Downward sloping
Why?
  -when interest rates are high, fewer investments are profitable; when interests rates are low more investments are profitable
  -Conversely, there are few investments that yield low rates of return

The investment demand curve: