Refer to the table in Figure 10.5 and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that the expected rate of return declines by 2 percentage points at each prospective level of investment. Assuming no change in the real interest rate, by how much and in what direction will investment change? Which of the following might cause this change:

(a) a decision to increase inventories;

(b) an increase in excess production capacity?

Figure 10.5:

Transcribed Image Text:

Expected rate of return, r, and real interest rate,/ (percents) 16 14 12 10 8 00 6 2 0 12 5 +++ Investment demand curve ID 10 15 20 25 30 35 40 Investment (billions of dollars)