Assume that for the entire business sector of the economy there is $0 worth of investment projects which will yield an expected rate of return of 25 percent or more.But there are $15 worth of investments which will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.Refer to the above information.If the real interest rate is 15 percent, what amount of investment will be undertaken?
A)$15
B)$30
C)$45
D)$60

Question

Quizplus · Accepted Answer

The investment projects that will be undertaken are those with an expected rate of return higher than the real interest rate. In this case, that includes the investment projects with an expected rate of return of 20-25%, which have a rate of return that exceeds the real interest rate by at least 5%. Therefore, $15 worth of investment projects will be undertaken. None of the other investment projects have a rate of return that is high enough to justify investing in them when the real interest rate is 15%.

Assume That for the Entire Business Sector of the Economy