Which of the following statements about investment in the theory of income determination is NOT correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Autonomous investment is not affected by the rate of interest.
In the theory of income determination, autonomous investment only means investment that does not depend on income. Other things, such as credit and the interest rate, can still change it.
Option (1) The interest rate is the cost of investible funds. — True. Firms borrow to invest, so the interest rate is what the funds cost.
Option (2) Autonomous investment is not affected by the rate of interest. — False. Autonomous means independent of income only. The interest rate can still change investment.
Option (3) At higher interest rates, firms tend to lower investment. — True. Dearer funds make firms invest less.
Option (4) Easy availability of credit encourages investment. — True. Easy credit makes it easier to fund new investment.
NCERT (2026-27): “4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output We have seen that the equilibrium level of income depends on aggregate demand. Thus, if aggregate demand changes, the equilibrium level of income changes. This can happen in any one or combination of the following situations: 1. Change in consumption: this can happen due to (i) change in C̄ (ii) change in c . 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.” |