Question

1. Explain, using Keynes’s concept of the marginal efficiency of capital, how it is possible foe investment spending to decline, even though the market rate of interest remains unchanged.

                                                                                                                        

2. As the classical school is to Isaac Newton, the Institutionalist school is to whom? Explain.

Answer 1

As indicated by Keynes investment choices are taken by looking at the marginal efficiency of capital (MEC) or the yield with the genuine rate of interest (r). Insofar as the MEC is more noteworthy than r, new investment in plant, hardware and apparatus will happen. Nonetheless, as increasingly more capital is utilized in the creation cycle, the MEC will fall because of lessening marginal result of capital. When MEC is compared to r, no new investment will be made in any pay procuring resource.

The MEC is the rate of discount which likens the current estimation of a progression of incomes realistic from a salary acquiring resource like a machine over its whole monetary life to the expense of the machine. The MEC is the rate of return at which a venture is relied upon to break­even. This relies upon the quick profits (incomes) anticipated from working the task and the rate at which these are required to decrease through decrease in the cost of yield, or increments in the genuine wages or cost of crude materials and fuel. On the off chance that all potential tasks in an economy are masterminded in dropping request of their MEC, speculators will acknowledge those with MEC higher than r and reject those whose MEC is lower than r. The MEC isn't equivalent to the marginal result of capital which is concerned distinctly with the prompt impact of extra capital on conceivable yield and not with how long the subsequent profits can be relied upon to continue.

The MEC is the rate of return (profits) on an additional rupee worth of investment. The marginal efficiency of capital reductions as the measure of investment increments .This is on the grounds that underlying investments are concentrated on the 'best' openings and yield high rates of return; later investments are less gainful and secure dynamically lower returns.

B.

As the classical school is to Isaac Newton, the Institutionalist school is to Thorstein Veblen.

During the nineteenth C., the chief test to the Classical school originated from the Historical school. The Historicists, primarily focused in Germany, didn't actually contest the Classical speculations, but instead addressed whether any theory was conceivable at all. They didn't accept any economic theory could hold across time nor stay valid in diverse social and institutional settings. Thusly, they proposed business analysts should quit attempting to verbalize general standards of economic theory by and large, and rather seek after an absolutely inductive and observational technique for examination