A profit-maximizing firm will undertake any investment project that adds to its profits. Under what conditions will a particular investment be profitable? By comparing the additional sales revenue generated by the project over time to the project’s anticipated costs, we can find the project’s expected rate of return, *r*. The investment project will be profitable if this expected rate of return exceeds the opportunity cost of the funds—the interest rate, *i*—used to finance the project. For the economy as a whole, all investment projects whose real rate of return exceeds the real rate of interest will be undertaken. That is, investment is undertaken up to the point where *r* = *i*.

Exploration: How is the demand for investment goods related to the real rate of interest? |

The graph illustrates the total dollar amount of investment projects (measured in billions of dollars on the horizontal axis) whose expected rate of return is at least r (measured in percent on the vertical axis.) For example, the graph shows that there are currently no investment projects whose expected rate of return is at least 12%, but $15 billion worth of investment projects whose rate of return is at least 6%. To use the graph, click and drag on the blue diamond to adjust the real rate of interest; click and drag on the *ID* label to shift the investment demand curve.

- What is the total dollar value of investment projects whose rate of return is at least 8%? How much total investment will take place if the interest rate is 8%?

See answer here - If the interest rate falls from 8% to 4%, what happens to total investment spending?

See answer here - Suppose a projected improvement in the economy increases the expected rate of return on every possible investment project by 2%. If the interest rate is 6%, what will happen to total investment?

See answer here - Explore on your own. What is the general relationship between the rate of interest, the rate of return on investment, and total investment spending?

See answer here