Determinants of Investment:
According to Keynes, employment based on investment. Employment varies on account of fluctuations in the investment. Thus, we should discuss what determines the quantity of investment. Investment spending is found out by:
1. Prospects of future prosperity or business confidence and2. Rate of interestFirms spend either from their own gains or by borrowing. House-holds saving have to decide whether to invest the money for gain or lend or deposit for interest. When the expected gain is more than the rate of interest, then the house-holds will invest. Or else they will lend or deposit their wealth for interest. Firms who invest their own gain will too decide in similar manner. Assume that the firms borrow for investment, and then they have to give interest for that. Therefore, firms will invest borrowed money only if the expected gain is more sufficient to pay the interest and cost of preliminary capital.
Therefore, in all the above conditions, the decision to invest will depend on the rate of interest and business confidence. Of such two, business confidence or expectations concerning future profitability has got more importance than the rate of interest. This is since rate of interest is stable in short run. The expectations regarding profitability include numerous considerations of the future concerning which there can’t be any certainty. Bleak prediction will lead to the reduction of investment and it will influence employment and vice-versa.
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