Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate, in percent. In addition, assume that G=0. In this case, the equilibrium real interest rate is:
A)2 percent.
B)5 percent.
C)10 percent.
D)20 percent.

Question

Quizplus · Accepted Answer

At equilibrium, Y = C + I + G. Given G = 0, we have 5,000 = (500 + 0.6*5,000) + (2,000 - 100r). Solving this gives r = 5 percent.

Assume That Equilibrium GDP (Y) Is 5,000