Interest Rates & Investment Demand/ Real (r%) v. Nominal (i%)

a. What is investment? Money spent or expenditures on:
1. New plants (factories)
2. Capital punishment (machinery)
3. Technology (hardware & software)
4. New Homes
5. Inventories (goods sold by producers)

b. Expected Rates of Return
How does business make investment decisions? Cost/ benefit analysis
How does business determine the benefits? Expected rates of return
How does business count the cost? Interest costs

How does business determine the amount of interest they undertake?
         -compare expected rate of return to interest cost
         * if expected return > interest cost, then invest
         * if expected return < interest cost, don't invest



Real (r%) v. Nominal (i%)
What's the difference? Nominal is the observable rate of interest. Real subtracts out inflation and is known as an ex post facto.