Why Does Investment Spending Depend On Interest Rates

Q: Why does investment spending depend on interest rates, among other factors? A: Investment spending depends on interest rates due to opportunity cost and risk. For example, when interest rates rise, the opportunity cost of your investment also increases. When interest rates are higher investors are willing to pay less for payment in the future. Which in turn leads to a lower rate of investment. The opposite can be said for falls in interest rates that are met will lower opportunity costs. Q: Why would most investments in the economy fail to take place if there were no financial institutions? A: Most investments in the economy would fail to take place if there were no financial institutions because many independent investors do not like to take large amounts of risk. By utilizing financial intermediaries, which are â€Å"organizations that receive funds from savers and channel them to investors,† people are given peace of mind in knowing that their source of money/investing is more stable and accounted for. Those who apply this principle also value the liquidity, or convertibility, that financial institutions provide in the case of emergency or cold feet. Q: Why do all societies have some form of money? A: All societies have some form of money because it makes economic transactions much more convenient and efficient. The purpose of money can be simplified into two main concepts including unit of account and store of value. Money serves as a unit of account which meansShow MoreRelatedWhy Does Investment Spending Depend On Interest Rates1078 Words   |  5 PagesQ: Why does investment spending depend on interest rates, among other factors? A: Investment spending depends on interest rates due to opportunity cost and risk. For example, when interest rates rise, the opportunity cost of your investment also increases. When interest rates are higher investors are willing to pay less for payment in the future. Which in turn leads to a lower rate of investment. The opposite can be said for falls in interest rates that are met will lower opportunity costs. Q:Read Moreeccc1266 Words   |  6 Pages(Outside Econ Department) Name: _________________________________ Student ID: _____________________________ Lecture: ________________________________ Multiple Choices    1. Which of the following would NOT be considered part of fixed investment spending (I)? A) Toyota buys a new robot for its automobile assembly line. B) Apple computer builds a new factory. C) Exxon increases its inventories of unsold gasoline. D) An accountant buys a newly built home for herself and her family. E) allRead MoreConsumption Function, Autonomous Consumption, And Marginal Propensity974 Words   |  4 Pagesrelationship between consumption spending and the level of income o C = Ca + by o Example: Income, wealth, interest rates, age, education, and family size are all part of spending, depending on your level of income. o The life-cycle theory assumes that household members choose their current expenditures optimally, taking account of their spending needs and future income over the remainder of their lifetime. †¢ Autonomous Consumption – The part of consumption that does not depend on income o Example: ElectricityRead MoreINTRODUCTION: Keynesian framework IS-LM Model According to Dornbusch (2011), the IS-LM model was1100 Words   |  5 Pagesfor investments and savings in the goods market while LM stands for liquidity preference and money supply in the money market. The model emphasizes the interaction between the goods and assets markets. Spending, interest rates and income are determined jointly by equilibrium in the goods and assets markets. The IS curve shows various combinations of interest rates and levels of income at which the goods markets clear while the LM curve shows that the demand for money depends on the interest rateRead MoreThe Economics of Money, Banking, and Financial Markets1072 Words   |  5 Pagesbetween interest rates on three-month Treasury bills, long-term treasury bonds, and Baa corporate bonds? The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is lower on average. The interest rate on Baa corporate bonds is higher on average than the other interest rates. 2. What effect might a fall in stock prices have on business investment? The lower price for a firm’s shares means that it can raise a smaller amount of funds, and so investment in plantRead MoreThe Economics of Money, Banking, and Financial Markets1056 Words   |  5 Pagesbetween interest rates on three-month Treasury bills, long-term treasury bonds, and Baa corporate bonds? The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is lower on average. The interest rate on Baa corporate bonds is higher on average than the other interest rates. 2. What effect might a fall in stock prices have on business investment? The lower price for a firm’s shares means that it can raise a smaller amount of funds, and so investment in plantRead MoreProject Paper Macroeconomics1161 Words   |  5 PagesWhen prices change, how do we measure real income? When prices change we measure real income with 3. What is unemployment? Why can’t it be driven down to zero? Unemployment is when you don’t have a job. Unemployed people are those who don’t have a job but are actively looking for work. Unemployment cannot be driven down to zero because the lower the unemployment rate is, the harder it will be for businesses to hire new employees. The harder it is to find qualified employees, the more competitiveRead MoreMonetary Policy And Fiscal Policy1178 Words   |  5 Pagesmaintain the market or stabilize the economy during a financial crisis. Monetary policy and fiscal policy are two tools by which government uses to guide the economy. Sometimes the economy is challenged with both inflation and unemployment at high rates. Macroeconomics breaks down the entire economy and the issues affecting it, including inflation, unemployment, economic growth, and monetary and fiscal policy. A country has to come up with good macroeconomic policies in order to better their economyRead MoreThe Study of Macroeconomics1507 Words   |  7 Pagesto the c hanged prices by changing the quantities they make, buy or sell. †¢ Why Macroeconomics Matters†¦ †¢ Cultural Literacy – â€Å"If you want to follow and participate in public debates and discussions, you need to know about macroeconomics.† – Self-interest – â€Å"the macro economy matters to you personally† †¢ Civic Responsibility – â€Å"working together, we can improve the macro economy.† †¢ Macroeconomic Questions †¢ Why do output and employment sometimes fall and how can unemployment be reducedRead MoreU.s. Government Budget Deficit And Debt1351 Words   |  6 Pagesnational and personal debt in the country. First, I am going to start with a definition of U.S government deficit: It is essentially the difference between what the U.S government spends in any fiscal year and the revenues it takes in. Any time the spending exceeds the revenues, the federal government runs a deficit. As many may already know the United States must increase its revenue or reduce expenses during the next decade in order to farther debt and loss of creditability in the world financial