Suppose that when the interest rate on loans is 16 percent


Suppose that when the interest rate on loans is 16 percent, businesses find it unprofitable to invest in machinery and equipment. However, when the interest rate is 14 percent, $5 billion worth of investment is profitable. At 12 percent interest, a total of $10 billion of investment is profitable.

Similarly, total investment increases by $5 billion for each successive 2-percentage-point decline in the interest rate.

Describe the relevant relationship between the interest rate and investment in words, in a table, on a graph, and as an equation. Put the interest rate on the vertical axis and investment on the horizontal axis. In your equation use the form i  a  bI , where i is the interest rate, a is the vertical intercept, b is the slope of the line (which is negative), and I is the level of investment. Comment on the advantages and disadvantages of the verbal, tabular, graphical, and equation forms of description.

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Macroeconomics: Suppose that when the interest rate on loans is 16 percent
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