REAL(r%0) VS. NOMINAL(i%)

What is the difference?

-Nominal is the observable rate of interest rate of interest. Real subtracts out inflation and is only known ex post facto.

How do you compute the real interest rate(r%)?

-r% = i% - inflation.

What then, determines the cost of an investment decision?

-The real interest rate(r%).

INVESTMENT DEMAND CURVE

What is the shape of the investment demand curve?

-Downward sloping.

Why?

-When interest rates are high, fewer investments are profitable; when interest rate are low, more investments are profitable.

SHIFTS IN INVESTMENT DEMAND(ID)

-Cost of production.

 *Lower costs shift(ID ->).
 *Higher costs shift(ID <-).

-Business taxes

 *Lower business taxes shift(ID ->).
 *Higher business taxes shift(id <-).

- Technological Change

 *New technological shifts(ID ->).
 *Lack of technological change shifts(ID <-).

-Stock of capital

 *If an economy is low on capital, then(ID ->).
 *If an economy is low on capital, then(ID <-).

-Expectations

 *Positive expectations shift(ID ->).
 *Negative expectations shift(ID ->).