Question

In: Economics

The following statement is false. Correct it, and justify the correction by stating two other factors...

The following statement is false. Correct it, and justify the correction by stating two other factors that can affect investment plans.

The expenditure plans of firms (i.e. investment plans) change every time the real interest rate changes.

Solutions

Expert Solution

The expenditure plans of the firm or the level of investment of the firm depends on the rate of of interest in the economy but there are other factors in the economy that also determine the level of investment in the economy. Thus, it cannot be stated that expenditure plan or investment plan of the firm changes every time the real interest rate changes. There are other factors also that determine the investment plan of the economy which are as follows:

a. Business Confidence- If investor sentiment or business confidence in the economy is low, then even a decrease in the rate of interest will not increase the investment level in the economy because overall business sentiment has fallen.

b. Expected return on investment or marginal efficiency of investment - If the overall marginal efficiency of investment in the economy remains low, then also interest rate will not have an impact on the level of investment in the economy.

Rahul Sunny answered 1 year ago
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