Assume there are no investment projects that will produce an expected rate of return of 8 percent or more.There are, however, $2 billion worth of investment projects with an expected rate of return at 7 percent, and an additional $2 billion for every drop of the interest rate by 1 percent.If the real interest rate is 3 percent in this economy, the cumulative amount of investment at the 3 percent or higher rate of return is
A)$10 billion.
B)$8 billion.
C)$6 billion.
D)$4 billion.

Question

Quizplus · Accepted Answer

The real interest rate is 3 percent, so we consider projects with a rate of return of 3 percent or higher. Starting from 7 percent, there are $2 billion worth of projects at each 1 percent drop: 7%, 6%, 5%, 4%, and 3%, totaling $10 billion.

Assume There Are No Investment Projects That Will Produce an Expected