2.2.3 Investment

Question 1

Investment

Answer 1

when business buy capital stock (anything that adds to production of an economy since it allows businesses to produce more)

Question 2

Gross investment

Answer 2

• accounts for capital before depreciation is taken into account

Question 3

Net investment

Answer 3

accounts for capital taking depreciation into account

Question 4

Factors affecting investment

Answer 4

• interest rates
• access to credit
• the rate of economic growth
• business expectations and confidence (Keynes & “animal spirit”)
• demand for exports
• influence of government and regulations

Question 5

How does interest rate affect investment?

Answer 5

• low interest rates = loans are cheaper = more money to spend on I = AD up - low interest = more consumption = more demand for g/s = more need to I

Question 6

Keynes “animal spirits”:

Answer 6

referred to a particular sort of confidence “naive optimism”, where entrepreneurs, encouraged by rising markets, take too many risks

Question 7

How does access to credit rate affect investment?

Answer 7

credit crunch = banks are less willing to lend to firms

Question 8

Factors affecting investment (influence of govt and regulation) example

Answer 8

Increased regulation = decreased profit incentive for I/FDI
- E.g Switzerland has low corporation tax

Question 9

Factors affecting investment (confidence) example

Answer 9

E.g Global Financial crisis

Question 10

Advantages of high investment

Answer 10

• injection into circular flow
• new capital
• creates extra demand
• increased competitiveness

Question 11

Advantages of high investment (injection) evaluation

Answer 11

Some investment (capital) might be imported -a leakage from the circular flow

Question 12

Advantages of high investment (new capital)

Answer 12

New capital = increased productivity & creates additional capacity to supply

Question 13

Advantages of high investment (new capital) evaluation

Answer 13

It might be a length time lag between workers getting more capital and productivity rising

Question 14

Advantages of high investment (creates extra demand)

Answer 14

-it creates extra demand in investment goods industries and can lead to strong multiplier effects on the levels of GDP

Question 15

Advantages of high investment (creates extra demand) evaluation

Answer 15

Some capital investment replaces labour & so = short term unemployment

Question 16

Advantages of high investment (increased competitiveness)

Answer 16

• increased competitiveness so increased trade balance

Question 17

Advantages of high investment (increased competitiveness) evaluation

Answer 17

There are other factors influencing competitiveness e.g exchange rates

Question 18

How does business confidence affect investment?

Answer 18

low confidence after financial crisis = business were worried about keeping their businesses going = they felt pessimistic about the prospects of returns from expansion = less likely to invest in growing their business

Question 19

Multiplier effect

Answer 19

Multiplier effect is where an initial change in
aggregate demand can have a greater final impact on
equilibrium national income (1)
• Injection of money from investment goes round the
circular flow multiple times/knock-on effects/further
effects

One person’s spending is another person’s income