• Investment = a change in the stock of capital over a period of time.
• Investments are undertaken upto the point at which the yield from an asset cover the cost of investment.
• The rate of interest represents the cost side of investment.
• A change in the rate of interest has a direct impact on the return on a sum of money lent.
• An increase in the rate of interest leads to future incomes being discounted more heavily.
• Therefore, some investments are not undertaken, as they fail to cover the cost.
• Some less productive investment are thus abandoned.
• The level of planned investment is inversely related to interest rate, assuming other variables unchanged (dI/dr) < 0.
