5. In the neoclassical theory of business fixed
investment, if the desired stock of capital is
greater than the existing stock of capital then,
other things remaining the same,
A. The gap between desired and existing stock of
capital will be exactly equal to investment in that
year
B. Investment in that year will be equal to a fraction
of the gap between desired and existing stock of
capital.
C. Investment in that year will be equal to a multiple
of the gap between desired and existing stock of
capital.
D. Investment will be determined exogenously.
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Answer:
After Keynes, a neoclassical theory of investment has been developed to explain investment behaviour with regard to fixed business investment.
This theory is called neoclassical theory of investment behaviour because it is based on the neoclassical theory of optimal capital accumulation which is determined by relative prices of factors of production.It may be recalled that fixed business investment refers to the purchase of machines, construction of new factories, warehouses, office buildings etc. by businessmen. The neoclassical theory of investment throws new light on the causes of fluctuations in investment which are responsible for occurrence of business cycles in a free market economy.
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