An economy has government purchases of 2000.Desired national saving and desired investment are given by
Sᵈ = 200 + 5000r + 0.10 Y - 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

To find the real interest rate that clears the goods market, set desired saving equal to desired investment: Sᵈ = Iᵈ. Substitute Y = 5000 and G = 2000 into the saving function: Sᵈ = 200 + 5000r + 0.10(5000) - 20(2000). Simplify to get Sᵈ = 200 + 5000r + 500 - 40000 = 5000r - 39300. Set this equal to Iᵈ = 1000 - 4000r and solve for r: 5000r - 39300 = 1000 - 4000r. Solving gives r = 0.0778 or 7.78%.

An Economy Has Government Purchases of 2000