When volume of investment increases the MEC tends to?


What happens to MEC when investment increases?

As long as MEC is more than the rate of interest investment will continue to be made, till the MEC and the rate of interest are equalized. … Thereafter investment has to be increased, either the rate of interest should fall or MEC should increase.

How does marginal efficiency of capital affect investment?

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 is MEC calculated?

Calculate MEC. Divide the sum of the projected profits from the investment (over the item’s service life) by the total investment under consideration.

How will a 100% increase in government spending affect equilibrium output?

A change of, for example, $100 in government expenditures will have an effect of more than $100 on the equilibrium level of real GDP. … This is called the multiplier effect: An initial increase in spending, cycles repeatedly through the economy and has a larger impact than the initial dollar amount spent.

Why did MEC decline?

As we shall see later on, the MEC declines as the rate of investment increases. It is the changes in the volume of investment which bring about the equality of the MEC and the rate of interest. When the MEC is equal to the rate of interest, investment will come to a halt; this is the point of equilibrium.

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What is MEC schedule?

General Schedule of Marginal Efficiency of Capital (MEC)!

The general marginal efficiency of capital (i.e., the marginal efficiencies of all types of capital assets during a given period) represents the schedule of the marginal efficiency of capital.