Assume that if the interest rate that businesses must pay to borrow funds were 20 percent,it would be unprofitable for businesses to invest in new machinery and equipment so that investment would be zero.But if the interest rate were 16 percent,businesses would find it profitable to invest $10 billion.If the interest rate were 12 percent,$20 billion would be invested.Assume that total investment continues to increase by $10 billion for each successive 4 percentage point decline in the interest rate.
-Refer to the above information.Which of the following correctly expresses the indicated relationship as an equation?
A) i = 20 - 4I.
B) i = 20 - .4I.
C) i = 24 - .4I.
D) i = 20 - 10I.

Question

Quizplus · Accepted Answer

The relationship between interest rate (i) and investment (I) is linear, decreasing by 4 percentage points for every $10 billion increase in investment. The equation i = 20 - 0.4I captures this relationship, where 0.4 is the rate of change in interest per billion dollars of investment.

Assume That If the Interest Rate That Businesses Must Pay