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Investment Demand Term Paper

Investment Demand Businesses experience profit cycles implying that market fluctuations are inevitable in an economy. Market demand plays a crucial role in the profitability of an enterprise and consequently affects the investment trend. A profitable firm is more likely to invest money to improve production facilities or to extend its business into other domains. Investors will analyze the profitability of any undertaking and only if the expected revenue is greater than the cost of capital will they invest in the project. Keynesian theory also states that the Marginal efficiency of Capital is inversely related to investment. "[t]o induce new investment 'the rate of return over cost must exceed the rate of interest'. [Richard C.B. Johnsson] For all businesses profit is the ultimate...

Hence we see that the capital spending intention is directly related to profitability of an enterprise.
Similarly interest rates of a nation have a direct bearing on the investment pattern of firms. Again it is the cyclical nature of the business which explains this. It's well-known that a considerable amount of household expenditure is based on borrowing. So if the interest rate is lowered it encourages more spending (more borrowing) by the consumers. In the same vein business are also dependent on borrowing funds for their capital investment and other infrastructural improvements. Interest rate is nothing but the cost…

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Bibliography

J. Bradford DeLong, From Investment Demand to the IS Curve: Low Interest Rates," Accessed on June 7th 2004, http://www.j-bradford-delong.net/multimedia/ISLM2.html

Richard C.B. Johnsson, 'The Liquidity-Trap Myth', Accessed on 7th June 2004, http://www.mises.org/fullstory.asp?control=1226
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