Refer to the table below and suppose that the real interest

Refer to the table below and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that the expected rate of return declines by 2 percentage points at each prospective level of investment. Cumulative Amount of Investment Having This Rate of Return or Higher (Billions per Year) $0 5 10 15 20 25 30 35 40 Real Interest Rate (i) and Expected Rate of Return (r) 16% 12 10 6 4 2 0 Assuming no change in the real interest rate, by how much and in what direction will investment change? Investment wiClick to selec by $ The investment schedule will shift to the ( (Click to selec Which of the following might cause this change: a decision to increase inventories or an increase in excess production capacity? 1 billion (Click to selec

Solution

Investment will decrease by $ 0.5 billion

When investment decreases by 2% from 25 billion then, investment decreases by 2% of 25 billion = 0.5 billion

Investment schedule will shift to the left

An increase in excess production capacity decreases the expected rate of return.