Equilibrium level of aggregate investment

Question

Suppose there are no investment projects in the economy that yield an expected rate of return of 25 % or more.  However assume there are $10 billion of investment projects yielding expected rate of return of among 20 and 25 percent; another $10 billion yielding among 15 and 20 percent; another $10 billion among 10 and 15 percent; & so forth.  Cumulate these data and graphically present them, putting the expected rate of overall return on the vertical axis and the amount of investment on the horizontal axis.  Describe the equilibrium level of aggregate investment if the real interest rate is (a) 15 percent, (b) 10 percent, and (c) 5 percent?  Describe why this curve is the investment demand curve.

 

 

Answer 1

See the below graph.  Aggregate investment:  (a) $20 billion; (b) $30 billion; (c) $40 billion.  This is the investment-demand curve since we have applied the rule of undertaking all investment up to the point where the expected rate of return, r, equivalent the interest rate, i.