This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
ScanSolve AI Answer
Step 1: Identify the given points on the investment demand curve. At interest rate r = 10\%, investment spending I = 3000. At interest rate r = 8\%, investment spending I = 4000. Step 2: Calculate the change in investment and interest rate. I = 4000 - 3000 = 1000 r = 8 - 10 = -2 Step 3: Calculate the slope of the investment demand curve. Formula for slope: m = ( I)/( r) Substitute values: m = (1000)/(-2) = -500 The slope of the investment demand curve is -500. To derive the equation of the investment line: I - 3000 = -500(r - 10) I = 3000 - 500r + 5000 I = 8000 - 500r Check at r=8\%: I = 8000 - 500(8) = 8000 - 4000 = 4000 ✓ This linear investment function I(r) = 8000 - 500r can be used to derive the IS curve via sY = I(r), or r = 16 - (s)/(500)Y (where s is the marginal propensity to save). -500