Distinguish between the return on investment and the return on Essay

Distinguish between the return on investment and the return on capital. Show the respective relevance of each to investment decisions - Essay Example ffect of the aggregate demand curve is the same as the demand curve, it shows the amount that the government and businesses are willing to spend on good (Perelman, 2007). Keynes postulates that the capital investment in equipment, plant and machinery will increase the production of goods in an economy. He further, says that investment consists of spending on stocks and finished goods. An increase in interest rate results to a decrease in investment hence a consequent decrease in the total demand. This happens on the ground that the interest rate and investment have an inverse relationship. The increase in interest rate increases the cost of capital hence decrease in demand total. However, a reduction in interest rate will lower the cost of the capital hence increase in investment and a consequent increase in aggregate investment. Keynes postulates that aggregate demand has a number of components. The demand function is Y=C(Y-T)+I (r) +G+NX (e) where I is income, I is consumption being a function of disposable income, I is investment being a function of interest rate, G is government expenditure and NX is net exports (exports minus imports). Keynes further ascertained that investment cannot, therefore, be a sole determinant of the aggregate demand. This means that a change in investment leads to a less proportionate change in the aggregate demand. A rising flow of investment increases the money supply in the economy. The government using its monetary policy, it employs the increase in interest rates to decrease the nominal supply in the economy as it increases the cost of capital (V). Additionally, the increase in the flow of investment increases the money supply in the economy leading to a shift of the money supply upwards and leftwards. This would consequently lead to an increase in prices and the real output (oil, petrol and