Q 1, 2, 3, 4, 8, 9
11.1 The four fundamental factors that affect the supply of and demand
for investment capital, and hence interest rates, are productive
opportunities, time preferences for consumption, risk, and inflation.
Explain how each of these factors affects the cost of money.
Supply for investment capital is the volume or amount of money inventors are willing to invest given certain factors that are considered critical. Demand for investment capital is the amount of capital needed by companies to finance their operations. On the supply side productive opportunities affect investors’ willingness to invest. To investors the investment would provide them the opportunity to get returns or yield. Expected opportunities for high returns would encourage them to invest. This would add to the supply of invested capital. Also the time preferences for consumption affects it by realizing that disposable income is supposed to be divided between consumption and savings; to maintain an equilibrium level, savings must be equal to investment. If you assume that there is a constant disposable income, an increase in consumption would result to lower savings and consequently lower investment. The amount of savings is therefore affected by a person’s level as well as timing of consumption. Consumption may be equivalent to the amount of funds needed to finance day to day operations or funds needed for the business to survive. This amount would determine the amount of investable funds. The timing of the need for funds would also determine investment decisions. Risk affects the supply side because risk involves uncertainty and may be manifested by variability of possible returns and safety of investment. The higher the degree of risk, the lesser the attractiveness of a particular investment. Investors have their criteria in selecting possible investment opportunities – one of the criteria is the degree of risk. Inflation affects the supply side because it affects...