ANSWER To determine the quantity of investment, firms compare the expected profit rate from an investment to the real interest rate. The expected profit from an investment is the benefit from the investment. The real interest rate is the opportunity cost of investment. If the expected profit from an investment exceeds the cost of the real interest rate, then firms make the investment. If the expected profit from an investment is less than the cost of the real interest rate, then firms do not make the investment.
ANSWER
ReplyDeleteTo determine the quantity of investment, firms compare the expected profit rate from an investment to the real interest rate. The expected profit from an investment is the benefit from the investment. The real interest rate is the opportunity cost of investment. If the expected profit from an investment exceeds the cost of the real interest rate, then firms make the investment. If the expected profit from an investment is less than the cost of the real interest rate, then firms do not make the investment.