If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when:
A)r is greater than i.
B)i is greater than r.
C)r falls.
D)i rises.

Question

Quizplus · Accepted Answer

When the expected rate of return from additional investment (r) is greater than the real interest rate (i), it means that the investment is likely to yield higher returns than alternative investment options available in the economy. Therefore, investors will be willing to invest more in the economy, leading to an increase in investment. Alternatively, if i is greater than r, it means that investing in the economy will yield lower returns than alternative investment options. As a result, investors will be less willing to invest in the economy, leading to a decrease in investment. Hence, choice A is the correct answer.

If the Real Interest Rate in the Economy Is I