If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then other things equal:
A)investment will take place until i and r are equal.
B)investment will take place until r exceeds i by the greatest amount.
C)r will rise as more investment is undertaken.
D)i will rise as more investment is undertaken.

Question

Quizplus · Accepted Answer

In a market economy, investment will take place until the expected rate of return from additional investment (r) equals the real interest rate in the economy (i). This is because investors aim to maximize their returns, and if the expected rate of return from additional investment is lower than the real interest rate in the economy, they would be better off investing in risk-free securities that offer a similar return without risk. On the other hand, if the expected rate of return from additional investment is higher than the real interest rate in the economy, investors would be incentivized to invest in these opportunities, leading to an increased demand for investment and driving up the real interest rate. Therefore, choice A is correct.

If the Real Interest Rate in the Economy Is I