Final answer:
The question provided does not include enough information to determine the country's exact level of investment based on the given interest rates. While lower real interest rates usually encourage investment, specific investment figures cannot be determined without additional data.
Step-by-step explanation:
If the nominal interest rate for investment borrowing is 12 percent and the expected inflation rate is 5 percent, we need to calculate the real interest rate to understand the level of investment. The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate, which in this case is 12% - 5% = 7%. The information provided does not give a direct relationship between the real interest rate and the precise level of investment in terms of dollars. However, a lower real interest rate, compared to the nominal rate, generally encourages more investment because the cost of borrowing is effectively lower.
To answer this question accurately, more data is needed regarding how investment levels are influenced by different real interest rates in this specific country. The example provided about taxes on interest income illustrates this point, as individuals are taxed on nominal gains without considering inflation, which can impact net returns and potentially the level of investment.
Without a clear function or model that connects real interest rates to investment levels, we cannot provide a specific figure for the country's level of investment. However, we know that the lower real interest rate may encourage higher levels of investment compared to a situation where the real interest rate is equal to the nominal rate.
Part b of the question provides an example with different numbers: if the interest rate is 9%, and the firm captures a 5% return to society, the effective rate of return for the firm is 4% (9% - 5%). Then, the firm would invest $183 million.