Investment and real interest rates | Macroeconomics | Khan Academy

Intuition as to why high real interest rates lead to low investment and why low rates lead to high investment Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/macroeconomics/income-and-expenditure-topic/is-lm-model-tutorial/v/connecting-the-keynesian-cross-to-the-is-curve?utm_source=YT&utm_medium=Desc&utm_campaign=macroeconomics Missed the previous lesson? https://www.khanacademy.org/economics-finance-domain/macroeconomics/income-and-expenditure-topic/keynesian-cross-tutorial/v/keynesian-cross-and-the-multiplier?utm_source=YT&utm_medium=Desc&utm_campaign=macroeconomics Macroeconomics on Khan Academy: Topics covered in a traditional college level introductory macroeconomics course About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy's Macroeconomics channel: https://www.youtube.com/channel/UCBytY7pnP0GAHB3C8vDeXvg Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy

Comments

1. This video is somewhat incorrect. I'm an investing enthusiast, and something I've heard many times in earnings calls is the comparison between interest rates, potential investments, and the cost of equity. Cost of equity is similar to an interest rate, but it's the effective "cost" of raising money by issuing shares. It's calculated by dividing the company's adjusted free cash flow by the market cap. This will often come up with a number in the range of 5-10%. If this number is higher than the expected return of the next best investment option, the most logical thing to do to add shareholder value is to indirectly return money to shareholders. Take on debt and use it to buy the company's own shares until the cost of equity equals the next best option. You can either grow earnings per share by increasing your earnings, or you can grow it by reducing the number of shares. In many cases, buying back shares is the best use of capital.
   The opposite is true as well. If the cost of equity is 5% and they see an investment opportunity that is 10%, it makes sense to issue new shares to fund capital investment.
   
   Central bankers completely missed this when they set monetary policy. They assumed that lower cost of debt would lead to increased investment. In reality, companies saw that their own shares were a better investment than capital expenditures, so they used debt to buy back shares. It also caused people to buy existing assets at higher prices instead of constructing new assets.
2. I'm just here for exams mate. I'd rather have a beer and a joint and lie in the park enjoying life and not trying to understand it. Ignorance is bliss.
3. what about project X ??
4. I watched this and am still happy.
5. I love you so much, MR KHAN!
6. how can one man, have all this knowledge.. lool and instead of yeezy taught me, Khann Taught me
7. thank you very much KING KHAN!!
8. If you could have replaced "project E" with "sub-prime borrowers" it may just bring to light whos fault the property bubble actually was...AKA Greenspan Very important video for understanding the implications of easy money policies. Your videos are great, keep them coming!
9. It's a small minority of people who actually take an interest in learning. The vast majority are ignorant and happy...
10. i care.
11. shut up no one cares if you are first or second or whatever you are
12. second
13. first? but thats to good for khanacademy