Question

Assume that the investment demand function is represented by the following algebraic function: I = $300 - 2000r where $300 represents autonomous investment and "r" represents the interest rate.

a) Calculate how high the interest rate would have to rise to drive planned investment to zero.
b) Calculate the amount of investment that would take place at an interest rate of zero.

Answer 1

The interest rate would have to rise to 15% to drive investment to zero and the investment amount at an interest rate of zero would be $300.

Step-by-step explanation:

To calculate how high the interest rate would have to rise to drive planned investment to zero, we use the given investment demand function I = $300 - 2000r. Setting I to zero and solving for 'r', we get r = $300/2000 = 0.15. Therefore, the interest rate would have to rise to 15% to drive the investment to zero.

To calculate the amount of investment that would take place at an interest rate of zero, we again use the investment demand function and substitute r with zero, resulting in I = $300 - 2000(0) = $300. So, the investment at an interest rate of zero would be $300.