Multiple choice

According to Keynes, investment depends on

  1. size of income and propensity to consume

  2. marginal efficiency of capital and size of income

  3. marginal efficiency of capital and rate of interest

  4. propensity to consume and rate of interest
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C Correct answer
Explanation

According to Keynesian theory, investment decisions depend on two key factors: the Marginal Efficiency of Capital (MEC) - the expected rate of return on new capital investment, and the prevailing rate of interest. Investors compare MEC with the interest rate - if MEC > interest rate, investment is profitable. Investment occurs when the expected return (MEC) exceeds the cost of borrowing (interest rate). Propensity to consume and income levels affect aggregate demand but don't directly determine the investment decision.

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