Page 97 - DECO402_Macro Economics

Macroeconomic Theory

Notes Except it, on the 1% rate of interest I = r or investment increased to 31 crores and continue. So the
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conclusion is that investment demand curve is downward similar as MEC curve.
Investment demand curve show the apposite relation between investment and rate of interest, it shifts
by that reasons, by which MEC change. On certain rate of interest, the level of interest will increase
to upward the investment demand curve and will reduce on downward. In figure 10.6, the rate of
interest like the level of interest will be 27 crores favorable on r = 12%. When investment demand
curve is upwards, marginal efficiency of capital on 12% is more than the 10% rate of interest on that
level of investment. Resultantly, investment becomes 31 crores, so the marginal efficiency falls and
become 10%, which are equals to the rate of interest.

10.5 Summary

y It is not necessary that the gross investment done in capital investment in economy, because
one part of new capital will necessary for the establishment of depreciated capital stock. The
expenditure on the establishment of depreciated capital during year is known as replacement
investment.

10.6 Keywords

y Investment —Input in the market. Land and money.
y Capital—Assets

10.7 Review Questions

1. What do you mean by investment?
2. What is the mean of marginal efficiency of capital?
3. Define the marginal efficiency of capital and interest rate.
4. Write note on ‘investment demand curve,

Answers: Self Assessment

1. plant 2. disappointed 3. (a) 4. (b)
5. (c) 6. (a)

10.8 Further Readings

Books 1. Macroeconomics— S. K. Chakravarti, Himalaya Publishing house, 2010.
2. Macroeconomics: Economic Growth, Fluctuations and Policy— Robert
E. Hall and David H. PaiPal, Vaina books, 2010.
3. Macroeconomics: Theory and Policy— H. L. Ahuja, S. Chand publisher,
2010.

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