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Marginal Efficiency of Capital (Part 2) - Macro Economic Framework, Macroeconomics Video Lecture | Macro Economics - B Com
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FAQs on Marginal Efficiency of Capital (Part 2) - Macro Economic Framework, Macroeconomics Video Lecture - Macro Economics - B Com
| 1. What is the Marginal Efficiency of Capital? |  |
Ans. The Marginal Efficiency of Capital (MEC) is a concept in macroeconomics that measures the expected rate of return on an investment project. It represents the additional output a firm expects to receive from an additional unit of capital investment. MEC is influenced by factors such as interest rates, expected future profits, and the level of confidence in the economy.
| 2. How is the Marginal Efficiency of Capital calculated? | |
Ans. The Marginal Efficiency of Capital is calculated by dividing the change in expected future profits by the change in the level of investment. It can be expressed using the formula: MEC = (ΔExpected Future Profits) / (ΔInvestment). This calculation helps businesses determine the feasibility and profitability of potential investment projects.
| 3. What factors affect the Marginal Efficiency of Capital? | |
Ans. Several factors influence the Marginal Efficiency of Capital. These include interest rates, expected future profits, the level of confidence in the economy, technological advancements, and government policies. Higher interest rates and lower expected future profits tend to decrease MEC, while lower interest rates and higher expected future profits increase MEC.
| 4. How does the Marginal Efficiency of Capital impact economic growth? | |
Ans. The Marginal Efficiency of Capital plays a crucial role in driving economic growth. When MEC is high, businesses are more likely to undertake new investment projects, leading to increased capital accumulation and economic expansion. On the other hand, if MEC is low, businesses may be reluctant to invest, which can hinder economic growth and development.
| 5. How does the Marginal Efficiency of Capital relate to the business cycle? | |
Ans. The Marginal Efficiency of Capital is closely linked to the business cycle. During periods of economic expansion, when confidence is high and expected future profits are favorable, MEC tends to be higher. This encourages firms to invest in new projects, contributing to the expansion phase of the business cycle. Conversely, during economic downturns, MEC may decrease as firms become more cautious about investing, leading to a contraction in economic activity.
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Dec 16, 2024 Last updated |
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