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What is the relationship between the rate of interest and the Marginal Efficiency of Capital (MEC)?
- a)The rate of interest is equal to the MEC.
- b)The rate of interest is inversely related to the MEC.
- c)The rate of interest has no impact on the MEC.
- d)The rate of interest is directly related to the MEC.
Correct answer is option 'B'. Can you explain this answer?
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What is the relationship between the rate of interest and the Marginal...
The relationship between the rate of interest and the Marginal Efficiency of Capital (MEC) is crucial in understanding investment decisions in an economy. Let's delve into the details:
Rate of Interest and Marginal Efficiency of Capital (MEC)
- Inversely Related: The rate of interest and the Marginal Efficiency of Capital (MEC) are inversely related. This means that as the rate of interest increases, the MEC decreases, and vice versa.
- Investment Decision: The MEC represents the rate of return expected from an additional unit of capital investment. When the rate of interest is high, the cost of borrowing capital increases, leading to a decrease in the expected rate of return on investment. As a result, businesses may be less inclined to invest in new capital projects, impacting the MEC.
- Impact on Investment: A lower MEC due to high-interest rates can deter businesses from making new investments, leading to a slowdown in economic growth. On the other hand, a decrease in the rate of interest can stimulate investment by making borrowing more affordable, thereby increasing the MEC.
- Economic Policy: Central banks often use changes in interest rates as a tool to influence investment decisions and overall economic activity. By adjusting interest rates, policymakers aim to strike a balance between stimulating investment and controlling inflation.
In conclusion, the rate of interest and the Marginal Efficiency of Capital are intricately linked, with changes in one affecting the other. Understanding this relationship is essential for policymakers and businesses to make informed investment decisions and drive economic growth.
Rate of Interest and Marginal Efficiency of Capital (MEC)
- Inversely Related: The rate of interest and the Marginal Efficiency of Capital (MEC) are inversely related. This means that as the rate of interest increases, the MEC decreases, and vice versa.
- Investment Decision: The MEC represents the rate of return expected from an additional unit of capital investment. When the rate of interest is high, the cost of borrowing capital increases, leading to a decrease in the expected rate of return on investment. As a result, businesses may be less inclined to invest in new capital projects, impacting the MEC.
- Impact on Investment: A lower MEC due to high-interest rates can deter businesses from making new investments, leading to a slowdown in economic growth. On the other hand, a decrease in the rate of interest can stimulate investment by making borrowing more affordable, thereby increasing the MEC.
- Economic Policy: Central banks often use changes in interest rates as a tool to influence investment decisions and overall economic activity. By adjusting interest rates, policymakers aim to strike a balance between stimulating investment and controlling inflation.
In conclusion, the rate of interest and the Marginal Efficiency of Capital are intricately linked, with changes in one affecting the other. Understanding this relationship is essential for policymakers and businesses to make informed investment decisions and drive economic growth.
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What is the relationship between the rate of interest and the Marginal...
The MEC is the rate of discount that equates the present value of expected yields from a capital asset to its supply price. It is inversely related to the rate of interest. As the rate of interest increases, the MEC decreases, and vice versa.
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What is the relationship between the rate of interest and the Marginal Efficiency of Capital (MEC)?a)The rate of interest is equal to the MEC.b)The rate of interest is inversely related to the MEC.c)The rate of interest has no impact on the MEC.d)The rate of interest is directly related to the MEC.Correct answer is option 'B'. Can you explain this answer?
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What is the relationship between the rate of interest and the Marginal Efficiency of Capital (MEC)?a)The rate of interest is equal to the MEC.b)The rate of interest is inversely related to the MEC.c)The rate of interest has no impact on the MEC.d)The rate of interest is directly related to the MEC.Correct answer is option 'B'. Can you explain this answer? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about What is the relationship between the rate of interest and the Marginal Efficiency of Capital (MEC)?a)The rate of interest is equal to the MEC.b)The rate of interest is inversely related to the MEC.c)The rate of interest has no impact on the MEC.d)The rate of interest is directly related to the MEC.Correct answer is option 'B'. Can you explain this answer? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is the relationship between the rate of interest and the Marginal Efficiency of Capital (MEC)?a)The rate of interest is equal to the MEC.b)The rate of interest is inversely related to the MEC.c)The rate of interest has no impact on the MEC.d)The rate of interest is directly related to the MEC.Correct answer is option 'B'. Can you explain this answer?.
What is the relationship between the rate of interest and the Marginal Efficiency of Capital (MEC)?a)The rate of interest is equal to the MEC.b)The rate of interest is inversely related to the MEC.c)The rate of interest has no impact on the MEC.d)The rate of interest is directly related to the MEC.Correct answer is option 'B'. Can you explain this answer? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about What is the relationship between the rate of interest and the Marginal Efficiency of Capital (MEC)?a)The rate of interest is equal to the MEC.b)The rate of interest is inversely related to the MEC.c)The rate of interest has no impact on the MEC.d)The rate of interest is directly related to the MEC.Correct answer is option 'B'. Can you explain this answer? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is the relationship between the rate of interest and the Marginal Efficiency of Capital (MEC)?a)The rate of interest is equal to the MEC.b)The rate of interest is inversely related to the MEC.c)The rate of interest has no impact on the MEC.d)The rate of interest is directly related to the MEC.Correct answer is option 'B'. Can you explain this answer?.
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