SA=−20 + 0.4Y
Ig = 25 − 3i
(Advanced analysis) The equations refer to a private closed economy, where S is saving, Ig is gross
Investment, i is the real interest rate, and Y is GDP. In equilibrium, the level of saving will be
A) $10.
B) $15.
C) $20.
D) $30.

Question

SA=−20 + 0.4Y 
Ig = 25 − 3i
(Advanced analysis) The equations refer to a private closed economy, where S is saving, Ig is gross
Investment, i is the real interest rate, and Y is GDP. In equilibrium, the level of saving will be
A) $10.
B) $15.
C) $20.
D) $30.

Quizplus · Accepted Answer

In equilibrium, saving equals investment. So, we can set SA = Ig and solve for Y:-20 + 0.4Y = 25 - 3i0.4Y = 45 - 3iY = (45 - 3i) / 0.4Y = 112.5 - 7.5iSince i is not given, we cannot find a specific value for Y. However, we can see that Y is a linear function of i, with a slope of -7.5. This means that as the real interest rate increases, GDP will decrease.Since the question asks for the level of saving in equilibrium, we need to find the value of SA when Y = 112.5 - 7.5i. Substituting this into the equation for SA, we get:SA = -20 + 0.4(112.5 - 7.5i)SA = -20 + 45 - 3iSA = 25 - 3iTherefore, the level of saving in equilibrium is $25.