Question about investment decisions on ECON

[Daniel.V]

Hello again.
I’m studying again some topics that i felt i hadnt gave enough attention before the level 1 exam because of time issues, and now i face my toughest challange again. ECON!
Well, reading the CFAI curriculum its said that:
Investment decisions depend primarily on two factors: the level of interest rates and aggregate output/income. The level of interest rates reflects the cost of financing investment. The level of aggregate output serves as a proxy for the expected profit- ability of new investments. When an economy is underutilizing its resources, interest rates are typically very low and yet investment spending often remains dormant because the expected return on new investments is also low. Conversely, when output is high and companies have little spare capacity, the expected return on new investments is high. Thus, investment decisions may be modeled as a decreasing function I(⋅,⋅)of the real interest rate (nominal interest rate minus the expected rate of inflation) and an increasing function of the level of aggregate output. Formally, I = I(r, Y)
(Institute 230)
Institute, CFA. CFA Institute Level I 2014 Volume 2 Economics. John Wiley & Sons P&T, 2013-07-12. VitalBook file.”
So, wait a minute. What is written above is that higher interest rates leads to higher private sector investment?
Maybe its too obvious but i always thought it was exactly the opposite.
Can someone give me some light on that thinking?

 

[Daniel.V]

OK. i think i got it.
Deacreasing function of interest rates, increasing function of aggregate income.
Lower interest = Higher Investment
Higher Incorme = Higher Investment.
The given example wasnt that good.

 

[Konigpops]

Like I wrote on my ‘History of Economic Thought’ Final Paper
“Men, for thousands of years spent time thinking about money while other men for thousands of years spent time making money.”
It’s econ. It’s always wrong - unless everyone thinks it’s right
What you’re referring to reminds me of the ISLM ADAS model, am I correct?
Also, your answer is this “Thus, investment decisions may be modeled as a decreasing function I(⋅,⋅)of the real interest rate “
Inverse relationships, my friend. Simplify to win and remember the tenets of good business. Would you purchase more capital if it cost too much thus reducing your ability to earn a return on your capital? (that alludes to -r)
And when you’re increasing your output in order to earn a return on your production, would that bid the overall level of interest or the cost of money up or down? Rather, is there more money available in the market for goods and services or less when products and services absorb money?
…and always keep in mind, Econ is just a language intelligent people learn to speak as though they’re prophetic and highly intelligent.
My Degree is in Economics, btw…

 

[MrSmart]

Konigpops wrote:
Like I wrote on my ‘History of Economic Thought’ Final Paper
“Men, for thousands of years spent time thinking about money while other men for thousands of years spent time making money.”
It’s econ. It’s always wrong - unless everyone thinks it’s right
What you’re referring to reminds me of the ISLM ADAS model, am I correct?
Also, your answer is this “Thus, investment decisions may be modeled as a decreasing function I(⋅,⋅)of the real interest rate “
Inverse relationships, my friend. Simplify to win and remember the tenets of good business. Would you purchase more capital if it cost too much thus reducing your ability to earn a return on your capital? (that alludes to -r)
And when you’re increasing your output in order to earn a return on your production, would that bid the overall level of interest or the cost of money up or down? Rather, is there more money available in the market for goods and services or less when products and services absorb money?
…and always keep in mind, Econ is just a language intelligent people learn to speak as though they’re prophetic and highly intelligent.
My Degree is in Economics, btw…

Bsc is Economics as well.
I believe the correct word is pretentious.

 

[Konigpops]

MrSmart wrote:

Konigpops wrote:
Like I wrote on my ‘History of Economic Thought’ Final Paper
“Men, for thousands of years spent time thinking about money while other men for thousands of years spent time making money.”
It’s econ. It’s always wrong - unless everyone thinks it’s right
What you’re referring to reminds me of the ISLM ADAS model, am I correct?
Also, your answer is this “Thus, investment decisions may be modeled as a decreasing function I(⋅,⋅)of the real interest rate “
Inverse relationships, my friend. Simplify to win and remember the tenets of good business. Would you purchase more capital if it cost too much thus reducing your ability to earn a return on your capital? (that alludes to -r)
And when you’re increasing your output in order to earn a return on your production, would that bid the overall level of interest or the cost of money up or down? Rather, is there more money available in the market for goods and services or less when products and services absorb money?
…and always keep in mind, Econ is just a language intelligent people learn to speak as though they’re prophetic and highly intelligent.
My Degree is in Economics, btw…

Bsc is Economics as well.
I believe the correct word is pretentious.

How?

 

[MrSmart]

Konigpops wrote:

MrSmart wrote:

Konigpops wrote:
Like I wrote on my ‘History of Economic Thought’ Final Paper
“Men, for thousands of years spent time thinking about money while other men for thousands of years spent time making money.”
It’s econ. It’s always wrong - unless everyone thinks it’s right
What you’re referring to reminds me of the ISLM ADAS model, am I correct?
Also, your answer is this “Thus, investment decisions may be modeled as a decreasing function I(⋅,⋅)of the real interest rate “
Inverse relationships, my friend. Simplify to win and remember the tenets of good business. Would you purchase more capital if it cost too much thus reducing your ability to earn a return on your capital? (that alludes to -r)
And when you’re increasing your output in order to earn a return on your production, would that bid the overall level of interest or the cost of money up or down? Rather, is there more money available in the market for goods and services or less when products and services absorb money?
…and always keep in mind, Econ is just a language intelligent people learn to speak as though they’re prophetic and highly intelligent.
My Degree is in Economics, btw…

Bsc is Economics as well.
I believe the correct word is pretentious.

How?

You’ve said that “Econ is just a language intelligent people learn to speak as though they’re prophetic and highly intelligent.”
The correct term for that would be pretentious.
A more detailed explanation in this context would be that economists usually sit on both ends of the table when talking, because when you a long track record of being inconsistently right, what choice do you have? They like to use pretentious language and vocabulary to make them sound smarter than they really are, without giving much content when all is said and done.