Question

1. What are the two factors that affect the level of investment, according to Keynes?
2. Does Keynes think investors are rational, irrational, or somewhere in the middle? Explain.

Answer 1

Answer - Two factors that affect the level of investment are Marginal efficiency of capital ( MEC) and the interest rates. The MEC denotes the returns whereas the interest rates denote the cost of investment . As per keynes , If MEC > Interest rates , investment will give the positive yield and it should be opted while if MEC < Interest rates , investment should be opted as the cost will be more than the yield.

As per the rational expectations theory , given by JM keynes , the people are rational in nature , the will take the decisions best based upon their rationality ,knowledge and the past experiences they have had. Thus the investors are rational in nature and invest wisely.