2.2.3 Investment (I)

• Investment is defined as spending by firms on capital goods to increase productive capacity.
• Gross investment refers to total spending on capital goods after depreciation is considered.

  False
• Net investment is calculated by subtracting depreciation from gross investment.
• Match the component of investment with its example:

  Fixed Capital Formation ↔️ Purchasing new machinery

  Inventory Investment ↔️ Stocking up on seasonal products

  Residential Investment ↔️ Building a new apartment complex
• Lower interest rates encourage firms to invest as borrowing becomes cheaper.
• Firms are more likely to invest if they are optimistic about future demand and economic conditions.
• Technological advancements can make existing capital more efficient, reducing the need for new investment.

  False
• Government policies such as tax incentives can encourage firms to invest.
• Match the factor influencing investment with its effect:

  Interest Rates ↔️ Increases with low rates

  Business Confidence ↔️ Increases with optimism

  Government Policies ↔️ Can increase or decrease
• Lower interest rates lead to cheaper borrowing costs, which encourages investment.
• High business confidence indicates firms are pessimistic about future economic conditions.

  False
• Technological advancements encourage investment by making existing capital obsolete.
• A decrease in interest rates can lead to an increase in investment as firms take advantage of cheaper borrowing.
• Factors influencing investment decisions can affect components such as fixed capital formation and inventory investment.
• What is the effect of lower interest rates on investment decisions?

  Encourages borrowing and investment
• Firms are more likely to invest if they are optimistic about future economic conditions.
• Technological advancements can make existing capital obsolete
• Match the factor with its effect on investment:

  Interest Rates ↔️ Increases with low rates

  Business Confidence ↔️ Increases with high confidence

  Technological Advancements ↔️ Can increase investment

  Government Policies ↔️ Can increase or decrease
• Lower interest rates decrease the cost of borrowing.
• What is the role of business confidence in investment decisions?

  Optimism about future demand
• Technological advancements often encourage firms to invest in newer, more efficient capital
• Government policies always encourage investment regardless of their nature.

  False
• What is the definition of investment in economics?

  Spending by firms on capital goods
• Net investment is calculated by subtracting depreciation from gross investment
• Match the investment concept with its role in aggregate demand:

  Gross Investment ↔️ Increases AD and productive capacity

  Net Investment ↔️ Reflects actual increase in productive capacity

  Investment (I) ↔️ A key component of AD
• What is fixed capital formation?

  Spending on capital goods
• Inventory investment refers to changes in the level of raw materials, work-in-progress, and finished goods
• Residential investment includes spending on new homes and renovations.
• How do low interest rates influence investment decisions?

  Encourage borrowing and investment
• High business confidence leads to optimism about future demand
• Describe the relationship between investment and interest rates.

  Inverse
• Lower interest rates make borrowing cheaper, encouraging investment.
• What are the three main types of government policies that promote investment?

  Tax incentives, subsidies, regulations
• Reduced taxes on profits or capital gains act as a tax incentive
• Match the government policy with its example:

  Tax Incentives ↔️ Tax breaks for renewable energy

  Subsidies ↔️ Grants for high-tech research

  Regulatory Environments ↔️ Streamlining building permits
• What is the formula for calculating aggregate demand?

  $AD =$$C +$$I +$$G +$$(X - M)$
• Fixed capital formation includes spending on capital goods like machinery and buildings
• Inventory investment involves changes in the level of raw materials, work-in-progress, and finished goods.
• What is residential investment?

  Spending on new homes
• How do low interest rates affect the cost of borrowing?

  Lower borrowing costs