Question

What occurs when \[I_g=I_r\]?

Options

• Net investment is positive and there is capital accumulation

• Net investment is zero and the economy is merely maintaining existing capital

• Net investment is negative and capital stock is shrinking

• Induced investment rises with national income

Answer 1

When Gross Investment equals Replacement Investment, all investment replaces worn-out capital. Net investment is zero, so existing capital is merely maintained.