As far as we are talking about investment then it is certain amount of money which is saved or use in some projects where we can take profit more than the money we have saved or invested. In general terms investment means the use of money to make more money.
Saving -- Objective: Short term needs Vehicles Used: Bank or money market accounts, CD's Risk: None on balances up to $200,000.00 per depositor (FDIC) Return: Low interest. Key Benefit: Money is safe and accessible.
Investing -- Objective: Long-term capital growth Vehicles Used: Stocks, bonds, mutual funds, tools, parts, equipment upgrades. Risk: Varies, depending on the source of securities owned. Return: Interest paid and capital gains earned. Lower cost of production in the future which allows greater net gains in the future. Key Benefit: Returns have outpaced inflation over the long term.
Getting back to the difference between a saver and an investor, there is one word that separates them, and that word is leverage. One definition of leverage is the ability to do more with less. Saving can be a good vehicle for gain, but only because it protects investors from themselves and from incompetent or unscrupulous advisors. The mistakes that can be made in choosing investments or by holding onto the wrong investments can cost us dearly. But choosing investments well and using them -- that holds the potential for great gains later.
Ans a) As it is clear that purchasing of any asset is a part of investment not a saving because saving means to get money store in banks or lockers. So, my family takes out a mortgage and buy a new house is an investment.
Ans b) It is also clear that anything deposited in a bank is a part of saving not a investment. So, my roommate earns $100 and he deposited that amount into his account at a bank not buying an asset. Here it is savings.
Ans c) It is also a part of investment because I borrow $1000 from bank to buy a car in a hope to earn more by using that car in pizza delivery business.
ANS8. When there is an increase in govt. spending it means that the govt. is doing expenditure and release the money flow in the market. So, it further states that govt. spending lead to increase in money supply and which further lead to investment and saving .
Ans b) In the economy we know that if there is demand in the market the price of the goods and services will effect, it will increase. and if price will increase in the market then govt. will increase the money supply in the economy. And which lead to effect the LM curve. An increase in money supply always reduce the rate of interest. If there is any increase in money supply than ,LM curve also leads to shift rightward.
Ans9. Monetary PolicyÂ
In the UK and US, monetary policy is the most important tool for maintaining low inflation. In the UK, monetary policy is set by the MPC of the Bank of England. They are given an inflation target by the government. This inflation target is 2%+/-1 and the MPC use interest rates to try and achieve this target.
The first step is for the MPC to try and predict future inflation. They look at various economic statistics and try to decide whether the economy is overheating. If inflation is forecast to increase above the target, the MPC will increase interest rates.
Increased interest rates will help reduce the growth of Aggregate Demand in the economy. The slower growth will then lead to lower inflation. Higher interest rates reduce consumer spending because:
increased interest rates increase the cost of borrowing, reducing spending
Increased interest rates make it more attractive to save money
Increased interest rates reduce the disposable income of those with mortgages 2. Supply Side Policies Supply side policies aim to increase long term competitiveness and productivity. For example, privatization and deregulation were hope to make firms more productive. Therefore, in the long run supply side policies can help reduce inflationary pressures.
ANS10. Desired consumption falls as real interest rate rises will be explained with the relationship between consumption and rate of interest.
Consumption function refers to the functional relationship between aggregate consumption and aggregate income C = f(y). The schedule shows the various amount of consumption at various levels of income. This shows that when income increases, consumption also increases, but in a lesser proportion (i.e.) the proportion of income spent on consumption goes on falling as income increases. A part of additional income is not consumed and is therefore saved.
Rate of Interest: If the interest is high, then people will forgot the present consumption and postpone it for a future date. Higher the rate of interest payable, lesser will be purchasing power. This will certainly reduce the consumption.
Desired investment falls as real interest rate rises will be explained with the relationship between Investment and rate of interest.
Mainly we know that there is the inverse relationship between investment and rate of interest in the economy. It can be explained with the example, that I borrow $2000 for purchase a car on which bank has allowed 15% rate of interest which is much higher. So, I have to pay $300 as rate of interest which is large amount for me. After doing all this calculations I had take important decision that I will not invest money on purchasing a car.
The investment decision is a marginal benefit-marginal cost decision
The marginal benefit from investment is the expected rate of return (r)
The marginal cost is the interest rate (i) that must be paid for borrowed funds; the two are the determinants of
investment spending.
An investment is made if the expected rate of return exceeds the interest rate (r > i). Investments are not made when interest rate exceeds the expected rate of return (r < i)
Expected rate of return:
Businesses only make investments when they expect to recieve profits.
r = (TR - cost of investment) / cost of investment.
Firms are risk takers. therefore, can't guarantee profits.
Firms have to think about expected rate of return must be greater than the real interest rate.
