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CA Foundation · Business Economics · Determination of National Income

Which of the following is most likely to cause an upward shift of the entire investment demand (marginal efficiency of capital) schedule, rather than a movement along it?

Higher business expectations of future profits shift the whole investment demand schedule upward. Interest rate changes, including those from a repo rate cut, only cause movements along the existing schedule.

  1. AA fall in the market rate of interest
  2. BA rise in businesses' expectations of future profitsCorrect
  3. CA rise in the rate of interest
  4. DA fall in the cost of borrowing due to RBI repo rate cut

Explanation

Changes in the interest rate cause movement along the investment demand curve. Improved profit expectations raise the expected returns at every interest rate, so the whole schedule shifts upward. A repo rate cut works through the interest rate, so it is only a movement along the curve.

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