Syndicate
Investment Expense
Economists develop the model of investment expense that the companies want to do, I, as a function of the interest rate, r, that is given as a percentage. The equation that we use is the standard one given in macroeconomics introduction sites.
I = I o I r *r
The parameter I r tells how much I diminishes in the total part of economics for an increase given in the interest rates. Let’s suppose for example that r increases a point in percentage. If I, is, let’s say, 10 thousand million, you know that each percentage point of increase in the interest rates will diminish the investment from 10 thousand million. Parameter I o will tell how much investment will be produced if the interest rates were at zero. In reality the interest rates never go down to zero, but let us suppose they do for a moment. Then the second term in the equation would be the same as zero, which would make I = I o. The equation in its totality shows that if the interest rates were at zero, the investment expenses would reach the maximum at I o. But as the interest rates increase, the investment diminishes more and more. In fact, the rates could go up so much that the expense in investment was at zero.
The relationship between the interest rates and investment is a reason of which the ability of the government to determine those rates has an enormous effect on the economy. By establishing the interest rates, the government can determine how much the businesses want to want to spend on buying investment goods. In fact, if the economy were in a recession, the government could diminish the interest rates to increase the investment expenses of the companies and therefore help the economy.