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Theme 2: The UK economy – performance and policies
2.2 Aggregate demand (AD)
2.2.3 Investment (I)
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Investment is defined as spending by firms on
capital
goods to increase productive capacity.
Gross investment refers to total spending on capital goods after depreciation is considered.
False
Net investment is calculated by subtracting depreciation from gross
investment
.
Match the component of investment with its example:
Fixed Capital Formation ↔️ Purchasing new machinery
Inventory Investment ↔️ Stocking up on seasonal products
Residential Investment ↔️ Building a new apartment complex
Lower interest rates encourage firms to
invest
as borrowing becomes cheaper.
Firms are more likely to invest if they are optimistic about future demand and economic
conditions
.
Technological advancements can make existing capital more efficient, reducing the need for new investment.
False
Government policies such as tax incentives can encourage firms to
invest
.
Match the factor influencing investment with its effect:
Interest Rates ↔️ Increases with low rates
Business Confidence ↔️ Increases with optimism
Government Policies ↔️ Can increase or decrease
Lower interest rates lead to cheaper borrowing costs, which encourages
investment
.
High business confidence indicates firms are pessimistic about future economic conditions.
False
Technological advancements encourage investment by making existing capital
obsolete
.
A decrease in interest rates can lead to an increase in investment as firms take advantage of
cheaper
borrowing.
Factors influencing investment decisions can affect components such as fixed capital formation and inventory
investment
.
What is the effect of lower interest rates on investment decisions?
Encourages borrowing and investment
Firms are more likely to invest if they are optimistic about future
economic
conditions.
Technological advancements can make existing capital
obsolete
Match the factor with its effect on investment:
Interest Rates ↔️ Increases with low rates
Business Confidence ↔️ Increases with high confidence
Technological Advancements ↔️ Can increase investment
Government Policies ↔️ Can increase or decrease
Lower interest rates decrease the
cost of borrowing
.
What is the role of business confidence in investment decisions?
Optimism about future demand
Technological advancements often encourage firms to invest in newer, more efficient
capital
Government policies always encourage investment regardless of their nature.
False
What is the definition of investment in economics?
Spending by firms on capital goods
Net investment is calculated by subtracting depreciation from gross
investment
Match the investment concept with its role in aggregate demand:
Gross Investment ↔️ Increases AD and productive capacity
Net Investment ↔️ Reflects actual increase in productive capacity
Investment (I) ↔️ A key component of AD
What is fixed capital formation?
Spending on capital goods
Inventory investment refers to changes in the level of raw materials, work-in-progress, and finished
goods
Residential
investment
includes spending on new homes and renovations.
How do low interest rates influence investment decisions?
Encourage borrowing and investment
High business confidence leads to optimism about future
demand
Describe the relationship between investment and interest rates.
Inverse
Lower interest rates make
borrowing
cheaper, encouraging investment.
What are the three main types of government policies that promote investment?
Tax incentives, subsidies, regulations
Reduced taxes on profits or capital gains act as a tax
incentive
Match the government policy with its example:
Tax Incentives ↔️ Tax breaks for renewable energy
Subsidies ↔️ Grants for high-tech research
Regulatory Environments ↔️ Streamlining building permits
What is the formula for calculating aggregate demand?
A
D
=
AD =
A
D
=
C
+
C +
C
+
I
+
I +
I
+
G
+
G +
G
+
(
X
−
M
)
(X - M)
(
X
−
M
)
Fixed capital formation includes spending on capital goods like machinery and
buildings
Inventory investment involves changes in the level of raw materials,
work-in-progress
, and finished goods.
What is residential investment?
Spending on new homes
How do low interest rates affect the cost of borrowing?
Lower borrowing costs
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