An economy has government purchases of 1000. Desired national saving and desired investment are given by S^d = 200 + 5000r + .10Y - .20G
I^d = 1000 - 4000r
When the full-employment level of output equals 5000, then the real interest rate that clears the goods market will be

Question

Quizplus · Accepted Answer

To find the real interest rate that clears the goods market, we need to set investment equal to saving:

1000 - 4000r = 200 + 5000r + .10Y - .20G

Substituting Y = 5000 and G = 1000, we get:

1000 - 4000r = 200 + 5000r + 500 - 200
800 = 9000r
r = 0.0889 or 8.89%

Since we are looking for the real interest rate, we need to subtract the expected inflation rate. If we assume the expected inflation rate to be 3%, then the real interest rate that clears the goods market is:

8.89% - 3% = 5.89%

Therefore, the best choice is B.

An Economy Has Government Purchases of 1000