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Capital

QuestionAnswer
State the reasons why investment is important? Increased productive capacity, increased labour productivity, increased employment, increased GNP, increased government revenues, investment generates future wealth for the economy.
State the factors that influence the level of investment in the Irish economy? Rates of Interest(cost of borrowing), business people's expectations, government economic policies, the international economic climate, the marginal efficiency of capital, stability in the banking sector, the cost of capital goods, availability of a skill
State the factors that influence the rate of savings in the Irish economy? Future expectations for the economy, security of savings, price levels(real rate of interest), quality of financial products, deferred spending, future levels of state benefits.
State the three reasons why people desire to hold wealth in money form? Transactionary motive, precautionary, speculative motive.
Explain the transactionary motive? People desire to hold money for day-to-day expenses e.g. buying goods and services.
Explain the precautionary motive? People desire to hold money for emergencies/rainy day e.g. illness, house repairs.
Explain the speculative motive? People desire to hold money for any possible profitable future investment opportunities.
State which motive is not affected by a fall in the rate of interest? Transactionary motive
State which motive is slightly negatively affected by a fall in the rate of interest? Precautionary motive
State which motive is greatly negatively affected by a fall in the rate of interest? Speculative motive
State the main influences on the transactionary motive? Levels of income, number of transactions/ level of expenditure
State the main influences on the precautionary motive? Levels of income, interest rates.
State the main influences on the speculative motive? Interest rates, market value of bonds.
Illustrate your understanding of the term capital? Anything man made which is used to produce goods and services.
Define the term marginal efficiency of capital? This is the extra profit earned as a result of employing one extra unit of capital.
Illustrate your understanding of the term fixed capital? The stock of fixed assets. e.g. plant , equipment, tools
Illustrate your understanding of the term social capital? The assets/wealth owned by the community/society in general. e.g. hospital, parks, roads
Illustrate your understanding of the term savings? Owners of capital who receive interest. The decision to save is made by individuals. Income not spent. e.g. income€100 less spending€80 means savings =€20
Illustrate your understanding of the term investment? Users of capital who pay interest. The decision to invest is made by producers/firms. Production of capital goods/ additions to capital stock e.g. purchase of new machinery by a firm.
Illustrate your understanding of the term capital widening? The amount of capital per worker remains unchanged. An increase in the capital stock, which leave the capital/labour ratio unchanged. e.g. period 1: 4 machines& 4 men. Period 2: 8 machines & 8 men
Illustrate your understanding of the term capital deepening? The amount of capital increase resulting in more capital per worker in the economy.
Explain the relationship between the holding of money and the rate of interest? When the rate of interest is low, the opportunity cost(of the interest foregone)is low, so people prefer to hold money.When the interest rate is high, the opportunity cost is high-as it is now more costly to hold money-so less money is held.
Created by: deborahh
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