Page 112 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 6: Investment

(c) Replacement Notes
(d) Induced
3. Net investment is gross investment minus ..................... investment.
(a) Ex-ante

(b) Ex-post
(c) Replacement
(d) Induced
4. ..................... investment is independent of national income or its rate of change.

(a) Induced
(b) Ex-ante
(c) Ex-post
(d) Autonomous

5. Induced investment depends on .....................
(a) National income
(b) Autonomous investment
(c) Aggregate demand

(d) Inflation rate

6.2 Factors affecting Investment Decisions

Business firms make investment in order to make profits. These decisions are usually influenced
by the following factors:
The rate of investment
The marginal efficiency of capital (or the yield)
The cost and productivity of capital goods
Business expectations

Profits
Process innovations
Product innovations

The level of income
6.2.1 The Rate of Investment

The lower the rate of interest, the lower will be the cost of borrowing money to acquire an
income-earning asset like a machine. So business firms, in general would be willing to make
more investment.
A simple example may illustrate the investment. Suppose a firm is faced with four investment
opportunities. The cost of each investment is 100 and each one involves receiving a single cash
flow after one year.

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