Question

suppose that for the entire economy no investment projects will yield an expected real return of more than 12%. However, 10 bil worth of projects will yield expected real returns of 9% to 11.9% , an additional 10 bil will yield expected real returns of 6% to 8.9% an additional 10 bil will yield expected real returns of 3% to 5.9% and an additional 10 bil will yield expected real returns of 0 to 2.9%. If the real rate of interest is 6%, desired investment spending will be

Answer 1

If the real rate of interest is 6%, the desired investment spending will be 20 billion worth of projects as only the ones with expected real returns equal to or higher than 6% will be pursued.

Step-by-step explanation:

In the described economy, if the real rate of interest is 6%, firms will only invest in projects that have an expected real return that is higher than the real interest rate.

Therefore, the 10 billion worth of projects with expected real returns between 0 to 2.9% and the 10 billion worth of projects with expected real returns between 3% to 5.9% will not be pursued since their returns are below the real interest rate.

On the other hand, the 10 billion worth of projects with expected real returns of 6% to 8.9% will be considered for investment because their lower bound matches the real interest rate, and the 10 billion worth of projects with expected real returns of 9% to 11.9% will also be considered because their returns are above the 6% real interest rate.

Hence, the sum of these two, which amounts to 20 billion worth of projects, represents the desired investment spending in the economy at a 6% real interest rate.