An economy has government purchases of 1000.Desired national saving and desired investment are given by
Sᵈ = 200 + 5000r + .10Y - .20G
Iᵈ = 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

At full-employment level of output (Y = 5000), the desired national saving is:

Sᵈ = 200 + 5000r + .10Y - .20G
Sᵈ = 200 + 5000r + .10(5000) - .20(1000)
Sᵈ = 200 + 5000r + 500 - 200 = 5000r + 500

The desired investment is:

Iᵈ = 1000 - 4000r

At equilibrium, Sᵈ = Iᵈ:

5000r + 500 = 1000 - 4000r
9000r = 500
r = 0.0556 or 5.56%

Therefore, the real interest rate that clears the goods market is 5.56%, which is option B.

An Economy Has Government Purchases of 1000