Question

1. An economy has government purchases of 2000. Desired national saving and desired investment are given by sd = 200+ 5000r + 0.10Y-0.20G pd - 1000 - 4000r When the full-employment level of output equals 5000, then calculate the real interest rate at which the goods market is in equilibrium

Answer 1

Solution:

  $S^{d}=200+5000r+0.10Y-0.20G$

$I^{d}=1000-4000r$

$S^{d}=300+5000r$

  $S^{d}=I^{d}$

  

$9000r=700$

  $r=\frac{700}{9000} = 0.07777$