1. What are the basic determinants of investment? Explain the relationship between the real interest rate and the level of investment.
Why is investment spending unstable? How is it possible for investment spending to increase even in a period in which the real interest rate rises?
2. Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year’s net revenue. What is the expected rate of return? If the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Explain.