Quiz 14: Investment, the Capital Market, and the Wealth of Nations


According to the given situation, the following changes in interest rates in the United States will be implemented. a) If there is an increase in positive time preference of lenders then the rate of interest will also increase. As this is a motivating factor. b) Interest rate will increase in the case of positive time preference increments of borrowers. c) An increase in domestic inflation will lead to an increase in interest rates. d) Uncertainty about a nuclear war also increases the rate of interest. e) Improved investment opportunities in Europe will also increase the rate of interest in the United States.

Capital investment refers to money spent in a business with the intention to use that money to buy fixed assets, rather than to cover the daily expenses of the business. If a firm purchases fixed assets or capital assets, like land, buildings, manufacturing plants, and machinery, which are likely to be productive over a numbers of years, it is known as capital investment. Firms regularly use machinery and other capital assets to produce goods and services, as the capital assets can produce much higher quantity in a limited period of time and bring down the per unit cost of production as compared to human capital. Also, capital investments are the effective ways of investment that are safe and could earn good returns even if they are sold. But, here the reason is they improve the productivity.

As we know that capital is something which is responsible for continuing services to business firms. There are two types of capital. One is physical capital which includes land, building, tools, machinery, and other natural resources. And the second is human capital which includes skills and knowledge of firm's human resource. Since the capital investment refers to money spent in the business with the thought that the money will be used to buy fixed assets, rather than used to cover the daily expenses of business. Investment is the purchase and development of capital resources including human and physical capital. Return on physical and human capital makes the decision of an investor similar. Profit provides incentives on both physical and human capital decision to start investment yielding an indefinite profit, determine and start profitable investment opportunities. Human capital investment refers to the investment on skills, knowledge, or education of human resource of a company, while the physical capital investment refers to the investment on physical productive plants, tools, and machinery. If the rate of return on physical capital investment is higher than the supply price of capital, then the investment is profitable. Yes , human capital investors do earn profit by enhancing the skills of their workers, which increase the productivity and provide greater amount of return. But the profit in human capital investment cannot be determined.

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