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CEME (Capital Economic Money Efficiency) [Copy this link to quote]

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Post time: 2019-10-03 13:29:04
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Efisiensi Marginal to Capital MEC

CEME (Capital Economic Money Efficiency) – The efficiency of marginal capital shows the expected rate of return on investment, at a given time. The efficiency of marginal capital compared to the interest rate.

Keynes explains the marginal efficiency of capital as follows:

“The marginal efficiency of capital is the same as the discount rate which will make the present value of a series of annuities given by the expected return of a capital asset over its lifetime equal to the price of its supply.” – J.M.Keynes, General Theory, Chapter 11

This theory shows that investment will be influenced by:

  • Marginal Efficiency in Capital
  • Interest rate

In general, lower interest rates make investment more attractive.

If the interest rate is 3%, then the company will need an expected rate of return of at least 3% of their investment to justify the investment.

If the marginal efficiency of capital is lower than the interest rate, the company would be better off not investing, but saving money.


CEME (Capital Economic Money Efficiency) – Why is interest rates important to determine the efficiency of marginal capital?

To finance investment, the company will borrow or reduce savings. If interest rates are lower, it is cheaper to borrow, or their savings provide lower returns making investments relatively more attractive.

Efisiensi Marginal pada Capital
  • Cutting interest rates from 5% to 2% will increase investment from 80 to 100.
  • The alternative to investing is saving money in a bank; this is an investment opportunity cost.

If the interest rate is 5%, then only projects with returns of more than 5% will be profitable.

How responsive are Investments to Interest Rates?

In Keynesian investment theory, interest rates are one important factor. However, in the liquidity trap, investment may not be responsive to lower Ceme Online interest rates. In some circumstances, the demand for investment is very inelastic.

In the trap of liquidity, business confidence may be very low. Therefore, apart from low interest rates, companies do not want to invest because they have low expectations of future profits.

Factors that shift the efficiency of marginal capital

At the same interest rate - more investment projects are demanded. This could reflect an improvement in economic conditions, which encouraged companies to invest in Domino Qiu Qiu.

Factors that can affect investment schedules

1. The cost of capital. If capital is cheaper, then investment becomes more attractive. For example, the development of steel rails makes trains cheaper and encourages more investment.

2. Technological change. If there is an increase in technology, it can make investments more useful.

3. Expectations and business confidence. If people are optimistic about the future, they will want to invest because they expect higher returns. In a recession, people may become very pessimistic, so even lower interest rates do not encourage investment. (e.g. during the 2008-12 recession, zero interest rates, but low investment) Ceme Online.

4. Supply of finance. If the bank is more willing to lend investment money it will be easier.

5. Demand for goods. Higher demand will increase the profitability of capital investment.

6. The rate of Taxes. Higher taxes will hamper investment. Sometimes, the government offers tax breaks to encourage investment.


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