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What effect does high spare capacity have on the need for investment?
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High spare capacity reduces the need to invest, as existing capacity can already meet demand.
What is the relationship between high competition and a firm's likelihood to invest?
High competition increases a firm's likelihood to invest as a strategy to maintain or increase market share.
How do low-interest rates affect a firm's ability to meet the hurdle rate?
Low-interest rates make it easier to meet the hurdle rate, which increases investment.
What happens to Aggregate Demand (AD) when there is a decrease in investment?
AD shifts left.
What determines a firm's business confidence?
Business confidence is determined by expectations of future profit and future demand.
What happens to Aggregate Demand (AD) when there is an increase in investment?
AD shifts right.
What effect does lower corporation tax have on investment?
Lower corporation tax increases retained profits, which boosts the potential for investment.
How does the level of competition in a market influence a firm's investment decisions?
High competition encourages firms to invest more in order to overcome competitors.
Describe the relationship between spare capacity and investment.
High spare capacity means there is less need to invest as existing capacity can meet demand. Low spare capacity increases the incentive to invest in order to boost capacity.
What is the 'hurdle rate' in the context of investment?
The hurdle rate is the required rate of return for investment projects to proceed.
What is the impact of lower prices of capital machinery on investment?
Lower prices of capital machinery reduce the cost of investment, increasing the propensity to invest.
Why might firms use retained profits for investment?
Retained profits involve using profits retained by the firm, reducing the need to borrow and thus avoiding interest costs.
What is the 'accelerator effect' in the context of investment?
The accelerator effect is when an increasing rate of real GDP encourages more investment, creating a positive feedback loop that furthers economic growth.
How do high-interest rates affect a firm's incentive to invest?
High-interest rates increase the cost of borrowing, reducing the incentive to invest and shifting AD left.
Explain how business confidence impacts investment.
High business confidence, driven by expectations of future profit and demand, increases the marginal propensity to invest. Low business confidence decreases the marginal propensity to invest.
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