This is “Review and Practice”, section 14.4 from the book Macroeconomics Principles (v. 1.0).
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Investment is an addition to the capital stock. Investment may occur as a net addition to capital or as a replacement of depreciated capital. The bulk of investment spending in the United States falls into the latter category. Investment is a highly volatile component of GDP.
The decision to save is linked directly to the decision to invest. If a nation is to devote a larger share of its production to investment, then it must devote a smaller share to consumption, all other things unchanged. And that requires people to save more.
Investment is affected by the interest rate; the negative relationship between investment and the interest rate is illustrated by the investment demand curve. The position of this curve is affected by expectations, the level of economic activity, the stock of capital, the price of capital, the prices of other factors, technology, and public policy.
Because investment is a component of aggregate demand, a change in investment shifts the aggregate demand curve to the right or left. The amount of the shift will equal the initial change in investment times the multiplier.
In addition to its impact on aggregate demand, investment can also affect economic growth. Investment shifts the production possibilities curve outward, shifts the economy’s aggregate production function upward, and shifts the long-run aggregate supply curve to the right.
Which of the following would be counted as gross private domestic investment?
Suppose a construction company is trying to decide whether to buy a new nail gun. The table below shows the hypothetical costs for the nail gun and the amount the gun will save the company each year. Assume the gun will last forever. In each case, determine the highest interest rate the company should pay for a loan that makes purchase of the nail gun possible.
A car company currently has capital stock of $100 million and desires a capital stock of $110 million.
Burger World is contemplating installing an automated ordering system. The ordering system will allow Burger World to permanently replace five employees for an annual (and permanent) cost savings of $100,000.
The table below shows a number of investment projects and their effective earned interest rates or returns. Given the market interest rates shown below, identify which projects will be undertaken and the total amount of investment spending that will ensue.
|Project||Return on project||Cost|
The table below describes the amounts of investment for different interest rates.
|Interest rate||Amount of investment (billions)|
Suppose real GDP in an economy equals its potential output of $2,000 billion, the multiplier is 2.5, investment is raised by $200 billion, and the increased investment does not affect the economy’s potential.
Use the information below to compute the levels of gross and net private domestic investment. Data are in billions of dollars.
Change in business inventories $ 59.3
Residential construction 369.6
Producers’ durable equipment 691.3
Nonresidential structures 246.9
Complete the table, which shows investment in the United States in billions of 2000 chained dollars.
|Year||Gross private domestic investment||Depreciation||Net private domestic investment|