Statement I: In the two-sector model, the investment function is an upward-sloping line parallel to the consumption function.
Statement II: Investment is taken as autonomous in the model, which means that it is not affected by the rate of interest.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both Statement I and Statement II are false.
Statement I: In the two-sector model, the investment function is an upward-sloping line parallel to the consumption function. — Incorrect. Investment is the same at every income, so the investment line is horizontal at the height Ī.
Statement II: Investment is taken as autonomous in the model, which means that it is not affected by the rate of interest. — Incorrect. Autonomous only means investment does not depend on income. The rate of interest still affects it: at higher rates, firms lower investment.
NCERT (2026-27): “Investment Function – Graphical Representation In a two sector model, there are two sources of final demand, the first is consumption and the second is investment. The investment function was shown as I = Ī Graphically, this is shown as a horizontal line at a height equal to Ī above the horizontal axis. In this model, Ī is autonomous which means, it is the same no matter whatever is the level of income.” “4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output … 2. Change in investment: we have assumed that investment is autonomous. However, it just means that it does not depend on income. There are a number of variables other than income which can affect investment. One important factor is availability of credit: easy availability of credit encourages investment. Another factor is interest rate: interest rate is the cost of investible funds, and at higher interest rates, firms tend to lower investment.” |