Question

Take three causes/determinants of Investment and explain how they would have to react/behave to lead to increased investment spending. Use real world examples to help illustrate your answer.

Answer 1

The first determinant of investment, is the interest rate. With a decrease in the interest rate by increasing the money supply, causes the investment spending to increase. For example, after 2008 financial crisis, the Fed reduced the federal fund rates up to the 0%. It caused an increase in investment spending.

The second determinant is the reduction in corporate taxation. A stimulus package that gives tax incentives, is going to encourage the investment spending and firms will invest more. It also happened when the government came up with the stimulus package for the different industries.It helped firm to increase their investment spending.

The third determinant is the increased level of savings that will increase the supply of loanable funds. It will reduce the interest rate and investment will increase. So, firms will be encouraged to make investment spending.