Q6. Why is investment spending unsta... [FREE SOLUTION] (2024)

FAQs

Q6. Why is investment spending unsta... [FREE SOLUTION]? ›

Answer and Explanation:

The future conditions are very volatile. They depend on situations like war, trade barriers, exchange rates fluctuations, political influences, constitutional laws, court jurisdictions, natural disasters, and others. All these factors influence investment decisions.

Investment spending is money spent on capital goods, or goods used in the production of capital, goods or services.

Capital investment allows for research and development, a first step to taking new products and services to the market. Additional or improved capital goods increase labor productivity by making companies more efficient. Newer equipment or factories lead to more products being produced at a faster rate.

Title English: investment spending. Definition English: Money spent on capital goods, or goods used in the production of capital, goods, or services. Investment spending may include purchases such as machinery, land, production inputs, or infrastructure.

Answer and Explanation: The investment spending is more volatile as compared to the compared spending. This is because the investment level varies from one year to another financial year. Any change in interest rate greatly affects the investment spending in the economy.

Answer and Explanation:

The reason why investment varies from time to time is that, unlike consumption, investment does not depend on income level. This means that for consumption to vary, the individual's level of income must either increase or decrease, thus shifting.

It is long-term rates that affect investment spending. Lower interest rates for consumers mean more spending. Lower interest rates for business mean increased production of goods, and the creation of new jobs for the people who produce, sell, and deliver the goods.

The main drivers of Planned Investment Spending are the interest rate, expected real GDP growth, and current production capacity. Investment spending tracks real GDP closely. Its share of real GDP has risen over the last few decades, albeit with many ups and downs along the way.

Gross investment consists of spending by government for fixed assets that directly benefit the public, such as highway construction, or that assist government agencies in their production activities, such as purchases of military hardware.

Why does investment spending increase? ›

If business confidence is high, then firms tend to spend more on investment, believing that the future payoff from that investment will be substantial. On the other hand, if consumer or business confidence drops, then consumption and investment spending decline.

Planned investment spending depends on interest rates, expectations on future real GDP, and present level of production capacity.

The three categories of investment spending namely; business fixed investment, residential investment (housing), and inventory investment tend to be determined by their respective return and how risky their investors can get.

The basic determinants of investment are the expected rate of net profit that businesses hope to realize from investment spending and the real rate of interest. When the real interest rate rises, investment decreases; and when the real interest rate drops, investment increases--other things equal in both cases.

Actual investment spending equals: the sum of planned investment spending and unplanned investment spending.

Spending is disbursing money for living expenses and others, while investing is spending your money to build your financial wealth. When you start to spend less on things that don't matter in the long-term, you can put that extra money in the right investment vehicles to set up for a secure future.

If business confidence is high, then firms tend to spend more on investment, believing that the future payoff from that investment will be substantial. On the other hand, if consumer or business confidence drops, then consumption and investment spending decline.

Common investing mistakes include not doing enough research, reacting emotionally, not diversifying your portfolio, not having investment goals, not understanding your risk tolerance, only looking at short-term returns, and not paying attention to fees.

As you can see from Figure 1.0, Investment is much more volatile than consumption or government spending. Investment is pro-cyclical. That means that it is strong when the economy is doing well and is weak when the economy is weak.

Investment and Economic Growth. Investment adds to the stock of capital, and the quantity of capital available to an economy is a crucial determinant of its productivity. Investment thus contributes to economic growth.