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State and explain FIVE factors affecting the level of investment in the Irish economy. - Leaving Cert Economics - Question b - 2006
Question b
State and explain FIVE factors affecting the level of investment in the Irish economy.
Worked Solution & Example Answer:State and explain FIVE factors affecting the level of investment in the Irish economy. - Leaving Cert Economics - Question b - 2006
Step 1
Rates of interest / Cost of borrowing
Answer
The rate of interest significantly impacts borrowing costs for businesses. A higher rate implies higher costs of borrowing, which can reduce profit margins. Consequently, when interest rates are elevated, businesses might be less inclined to invest, fearing that their profits will diminish. Conversely, lower interest rates tend to encourage investment, as they decrease the financial burden on companies.
Step 2
Business people's expectations about the economic future
Answer
Optimism among business leaders regarding the economy can greatly influence their investment decisions. When they are confident about future economic conditions, marked by low inflation and growth prospects, they are more likely to increase investments. Conversely, a pessimistic outlook can lead to reduced investment as firms hold back due to uncertainty.
Step 3
The cost of capital goods
Answer
The overall cost of capital goods determines the potential profitability of investments. If capital goods are expensive, the return on investment diminishes, making firms hesitant to invest. Thus, a high cost of capital goods leads to lower investment levels in the economy.
Step 4
Government policies
Answer
Supportive government policies can drive business investment significantly. For instance, grants, tax reductions, and infrastructure developments create an environment conducive to investment. When policy frameworks are advantageous, businesses are encouraged to invest more, believing that such support can lead to favorable returns.
Step 5
The international economic climate
Answer
Ireland, as an open economy, is highly affected by global economic conditions. When the international market is thriving, this can create increased demand for products and services, prompting local firms to expand and invest. Conversely, a downturn in global markets can deter investment as demand wanes.