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 $10 billion yielding at least 10 percent; and so forth.
Homework Answers
(a)
| Expected rate of return (%) | Cummulative Investment ($ billion) |
| 25 | 0 |
| 20 | 10 |
| 15 | 20 |
| 10 | 30 |
| 5 | 40 |
| 0 | 50 |
(b) Equilibrium level of aggregate investment if the real rate of interest is 15 percent.
Answer: $20 billion.
Equilibrium level of aggregate investment if the real rate of interest is 10 percent.
Answer: $30 billion.
Equilibrium level of aggregate investment if the real rate of interest is 5 percent.
Answer: $40 billion.
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Assume there are no investment projects in the economy that
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