Including induced investment would give the line a slight positive slope equal to the marginal propensity to invest. 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. (i) Distinguish between autonomous investment and induced investment. Subsequently, an inverse relationship exists between rate of interest and investment. MPl is the ratio of change in investment to the change in income. 3.9 that, whatever the level of income, the level of autonomous investment has been fixed at OA. Autonomous Investment: An autonomous investment is an investment in a country that is made without regard to the level of economic growth. Induced Investment is positively related to the income level. Saving-Investment Controversy – Explained. Investment and capital are interrelated. Refer to Figure 12-3. Period Output Income Required Stock of Capital Capital Replacement Net Investment Gross Investment t -1 … Thus, Keynes pointed out MEC as an important factor in capital investment and highlighted on the following: Rate of interest refers to the cost of investment. demand) also tends to increase. At a high level of income, Consumption expenditure increases this leads to an increase in investment of capital goods, in order to produce more consumer goods. Welcome to EconomicsDiscussion.net! downward and decrease equilibrium GDP. Explain the distinction between ‘autor mous investment’ and “induced investment’. Induced Investment Function real interest rate (i) I = f(i, e) I = f(i) I I Investment Diagram: Induced Investment Induced investment has a negative relationship with real rate of interest. Recent Posts. This anticipation depends upon the level of income and the level of effective demand of consumers. A-Level Model Essays £8.00 . Thus, autonomous investment, as per Fig. 2) relation with It is directly influenced by income. If investment does not depend either on income/output or the rate of interest, then such investment is called autonomous investment. C = a + b Yd; This suggests consumption is primarily determined by the level of disposable income (Yd). The price level effects consumer spending through changes in real. [CBSE 2008; AI 08, 09] Answer: (i) Consumption function expresses functional relationship between aggregate consumption and national income. Since, interest rate normally remains constant, MEC is the determining factor of investment. II is the investment curve showing the level of investment planned to be undertaken by the investors in the community. Such investment is thus not influenced by profitability and so is independent of the level of income. Keynesian SR/LRAS
Keynes argued that as there is nothing inherent in the economy to move the SR into the LR, then SRAS = LRAS
NB
In diagrams taking a Keynesian you may see the AS curve labeled Keynesian AS or simply LRAS as long as the diagram’s title makes clear which perspective is being adopted