Businesses make investment decisions by cost-benefit analysis
Businesses determine the benefits through expected rate of return
Businesses Count the cost of interest costs
Businesses the term in the amount of investment they undertake by comparing expected rate of return to interest cost. If the expected return is greater than the interest cost then they invest. If the expected return is less than the interest cost them they don't invest.
Real interest rate: R%=1%-pi
R= real
I= nominal
PI= inflation
- Nominal is the observable rate of interest
The real interest rate determines the cost of an investment decision
Downward sloping is the shape of the investment demand curve
No comments:
Post a Comment