Homework Answers
Answer-A, higher real interest rate
The above diagram shows relationship between real interest rete, quantity of investment and profit rate.
As per above figer if real interest rate increases quantity of investment will decrease. And decrease in real interest rate will lead to increase in quantity of investment.
Because the demand curve of investment is downward, hence higher real interest rate will shift to demand curve of investment from ID0 to ID2.
All other options are wrong
This figer does not give any information about inventories and business taxes.
Option- C, the figer shows that if expected profit rate increases the demand curve will shift from ID0 to ID2. If a new profitable investment opportunity will shift the demand curve of investment right.
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