Answer to Question #232799 in Macroeconomics for Ascona

Question

Discuss five factors that influence investment

Answer 1

1.   Interest rates

Interest rate is the cost firms and households incur when they borrow money. When the interest rate increases, the cost of borrowing money also increases. Therefore, the firms will reduce their borrowing and hence a reduction in investment. On the contrary, a decline in the interest rates increases borrowing and thus a rise in investment.

2.   Future expectations

If firms anticipate hard economic times in the future, they will reduce their investment. On the other hand, if businesses anticipate an economic boom in the future, they will increase their investment.

3.   Rate of technological development

An increase in the rate of technological progress acts as an incentive to invest since it lowers the cost of production. Conversely, a decline in the rate of technological progress will result in a reduction in investment.

4.   Government policies

Favorable government policies such as lower taxes, subsidies, and less stringent planning laws act as an incentive to investors, thus culminate in an increase in investment. On the other hand, unfavorable government policies such as stringent planning laws and higher taxes discourage investors and thus result in a reduction in investment.

5.   Political stability

When there is political stability, law and order prevail and thus provide a conducive environment that fuels investment. On the contrary, political instability makes investors shy away and thus causes a fall in investment.