Question

Answer the question on the basis of the following information. Assume that if the interest rate that businesses must pay to borrow funds were 20 percent, it would be unprofitable for businesses to invest in new machinery and equipment, so Investment would be zero. But if the Interest rate were 16 percent, businesses would find it profitable to invest $10 billion. If the Interest rate were 12 percent, $20 billion would be invested. Assume that total investment continues to increase by $10 billion for each successive 4 percentage point decline in the interest rate. Refer to the Information. Which of the following correctly expresses the indicated relationship as an equation?
a) 1-20 - 10
b) 120-4L
c) 1-20 - 41
d) 1-24 - 41

Answer 1

If a business intends to invest by borrowing funds it will have to pay interest on the borrowed amount.

If the interest rate is 20% or above the investment will not make any profits therefore the borrowing rate should be below 20%.

At the rate of 16% company is able to generate profits by an investment of $10bn. It he borrowing rate further declines to 12% the company can invest $20bn.

If the rates decline by 4 percentage points the company can invest further $10bn.

The correct expression equation will be i = 20 - 4L

The correct answer is b.

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