Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be:
A)240.
B)700.
C)760.
D)970.

Question

Quizplus · Accepted Answer

To calculate the real rate of interest, we subtract the inflation rate from the nominal rate of interest:
Real rate of interest = Nominal rate of interest - Inflation rate
= 10% - 2%
= 8%
Now, we can use the investment function to find the level of investment:
I = 1,000 - 30r
= 1,000 - 30(8)
= 1,000 - 240
= 760
Therefore, the level of investment will be $760. The best choice is C.

Assume That the Investment Function Is Given by I =