Factors That Determine Investment

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Factors that determine investment:
1. Marginal efficiency of capital:-
The marginal efficiency of capital is called the expected return of capital or expected rate of profit on an investment.

PV = R + R + R + …………… + R (1+i) (1+i) (1+i) (1+i)

Keynes define the marginal efficiency of capital as “ MEC is being equal to that rate of discount which make the present value of the series of annuities given by the returns expected from the capital during its life just equal to its supply price. From the above equation and definition we can conclude that marginal efficiency of capital is inversely related to present value of an investment.

1. Rate of interest:-
The investment decision that depends not only marginal efficiency of capital but on the interest rate as well. Marginal efficiency is the gain from an investment while interest rate is the cost of an investment.

Fiscal policy:-
Fiscal policy is concerned with government expenditures and revenues. According to Paul A. Samuelson “Fiscal policy is concerned with all those arrangements which are adopted by government to collect the revenue and make the expenditures, so as the economic stability could be attained without inflation and deflation.

Objective of fiscal policy:-
The main objectives of fiscal policy are as:

1. Price control:-
The price stability is the main objective of fiscal policy. Too high and too low prices are not considered as good for an economy but a reasonable rate if prices increase that is considered as price stability. While increase in prices above that rate has many long run social and economic effects, but mainly the fixed income groups suffer at the maximum. In such situation government plays her role through fiscal policy by reducing the government expenditures or by increasing the taxes.

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