Question

According to the neoclassical theory of investment, expectations of a fall in the relative price of capital goods should increase investment. True or false?

A detailed explanation would be very much appreciated. Thank you kind souls :)

Answer 1

false , as it is expected that relative price of capital goods fall in near future so people invest less now when it falls then increase their investment. as it is expected that relative price of capital goods fall people buy less at present and when they fall then they buy more of capital goods and investment decrease at present when price fall then investment increase as they buy more of capital goods.as in neoclassical theory of investment marginal efficiency of capital increases then investment increases.