Investment and Disposable Income

What is investment?
-Money spent or expenditures 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 costs
-How does business determine the amount of investment they undertake? Compare expected rate return to interest cost (if expected return>interest cost, then invest; "" < "" then do not invest)

Real (r%) v Nominal (i%)
-What is the difference?
*Nominal=observable rate of interest
*Real= subtracts out the inflation and is only known ex post facto '
-How do you compute the real interest rate?
*real interest rate=nominal-inflation
-What then, determines the cost of an investment decision?
*The real interest rate (r%)

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

Shifts in ID
-Cost of production
-Business taxes
-Technological change
-Stock of capital
-Expectations

Disposable Income (DI) consumption and saving
-Income after taxes and net income
-DI=Gross Income-Taxes
-2 Choices with DI
*Consume (Spent money on goods and services)
*Save (Not spend money on goods and services)

Consumption
-Household spending
-The ability to consume is constrained by the amount of DI and the propensity to save
-Do households consumer if DI=0?
*Autonomous consumption
*Dissaving

Saving 
-Household NOT spending
-The ability to save is not constrained by the amount of DI and the propensity to consume
-Do households save if DI=0?
*No