Chapter 43
Investment Spending and Profit
LEARNING OBJECTIVES
Compare and contrast investment and consumption spending.
OUTLINE OF CHAPTER
I. Gross and Net Investment
II. Investment Fluctuates Violently
III. Decision to Invest
KEY TERMS
depreciation
the dollar value of worn
–
out plants and equipment
gross investment
the total value of all capital goods produced in a year
net investment
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Compare and contrast investment and consumption spending.
1. Define net investment, replacement investment, new investment and gross investment.
2. How do investment and consumption behave over the business cycle?
Explain why businesses invest and why investment spending fluctuates with profits.
3. Give two reasons why investment is strongly influenced by profits.
Investment requires two things: the funds necessary to make the investment and the
4. Where do business owners get funds to invest?
Discuss how investment fluctuations are a direct cause of business cycles.
5. Give several reasons why investment does not immediately follow profits but occurs
only after a time lag.
A time lag reflects the time needed for information about business conditions to be
APPENDIX 43.1
The Stock Market and Investment
LEARNING OBJECTIVE FOR APPENDIX 43.1
Describe general movement of stock market and the business cycle.
SUMMARY OF APPENDIX
ANSWERS TO APPENDIX 43.1 REVIEW QUESTIONS
Describe general movement of stock market and the business cycle.
1. Why do individuals invest in the stock market?
2. According to the movement of S&P 500 and the business cycle, when should investors
sell? Buy? Explain.
Generally, the value of stocks goes up in economic expansions and down in contractions.