Suppose the Auto Industry Has Several Investment Projects with an Expected

question 308

Multiple Choice

Suppose the auto industry has several investment projects with an expected rate of return of 15 percent, the aluminum industry has projects with an expected return of over 20 percent, the publishing industry projects with an expected return of 10 percent, the steel industry has projects with an expected return of 7 percent and the rubber industry projects with an expected return of 5 percent. The current market rate of interest is 7 percent. A reduction in the supply of funds causes interest rates to rise to 11 percent. The effect is to

• A) cause the firms in the steel and publishing industries to cancel their projects, which would have been funded at the old interest rate.
• B) cause the firms in the steel and the rubber industries to go ahead with their projects.
• C) force the firms in the automobile industry and the publishing industry to rely on funding their projects through other means.
• D) make the projects of the aluminum industry and the steel industry unprofitable; the firms in these industries will not borrow the funds or make the investments.

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