If the real interest rate in the economy is i and the expected rate of return on 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 fall as more investment is undertaken.

Question

Quizplus · Accepted Answer

In a market economy, investors will only invest up to the point where the expected rate of return (r) equals the real interest rate (i). This ensures that resources are allocated efficiently and that the return on investment is not outweighed by the cost of borrowing. If r exceeds i, then more investment would take place until r equals i. Similarly, if i exceeds r, then less investment would occur until r equals i. Therefore, choice A is the best answer.

If the Real Interest Rate in the Economy Is I