Question

Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. but suppose there are $10 billion of investment projects yielding expected returns of at least 20 percent; another $10 billion yielding at least 15 percent; another $10 billion yielding at least 10 percent; and so forth.
a. draw this relationship between the expected rate of return and the amount of investment expenditure. instructions: use the tool provided 'id' to plot the investment demand curve (plot 6 points total).
b. what will be the equilibrium level of aggregate investment if the real interest rate is as follows: instructions: enter your answers as whole numbers. 15 percent: 10 percent: 5 percent:

Answer 1

Answer: Equilibrium level of aggregate investment for the given rates will be

(a) At 15% - $20 billion;

(b) At 10% - $30 billion;

(c) At 5% - $40 billion.

The idea is to invest up to the point where your expected rate of return is equal to the real interest rate i.

For graph see attachment.