Microeconomics 19th Edition by Campbell McConnell,Stanley Brue,Sean Flynn

Exercise 5

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 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 + bl, 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.