What is determined by marginal efficiency of capital and rate of interest?

The marginal efficiency of capital displays the expected rate of return on investment, at a particular given time. The marginal efficiency of capital is compared to the rate of interest. This theory suggests investment will be influenced by: The interest rates.

What is marginal efficiency of capital schedule?

Marginal efficiency of capital is the rate return expected to be obtainable on a new capital asset over its life time. J.M. Keynes defines marginal efficiency of capital as the: “The rate of discount which makes the present value of the prospective yield from the capital asset equal to its supply price”.

How does marginal efficiency of capital affect investment?

In case the marginal efficiency of capital is lower than the current rate of interest, investors would rather save than make an investment. The diagrammatical representation of the investment demand curve gives a curve which is known as the investment demand function or the marginal efficiency of capital curve.

How does MEC determine the level of investment?

MEC and the rate of interest are the two important factors which affect the volume of investment and these two must be determined beforehand independently of each other. Once the MEC becomes equated to the rate of interest, equilibrium investment is determined.

What is the function of marginal efficiency of capital?

Here e is called the marginal efficiency of capital (MEC) by Keynes. It is that rate of discount that will make the present value of the returns from a capital asset during its economic life (which depends on the rate of depreciation) exactly equal to its market price or acquisition cost.

What are the three 3 factors that influence the required rate of return by investors?

The required rate of return is influenced by the following factors:

• Risk of the investment. A company or investor may insist on a higher required rate of return for what is perceived to be a risky investment, or a lower return on a correspondingly lower-risk investment.
• Liquidity of the investment.
• Inflation.

What is the slope of the marginal efficiency of capital curve?

The downward slope of the MEC curve indicates the negative relationship between the level of investment and the MEC. As the level of investment rises from I0 to I1, the MEC falls from i0 to 1i . Thus, with the increase in the level of investment the marginal efficiency of capital falls and vice – versa.

What are the basic factors to be considered in determining the rate of return?

Factors that influence your rate of return include the mix of assets, the business’s strategy and operations, the state of the economy, political stability, fiscal policy and regulations.

What are the four main determinants of investment?

What are the four main determinants of​ investment? Expectations of future​ profitability, interest​ rates, taxes and cash flow. How would an increase in interest rates affect​ investment? Real investment spending declines.