An economy has government purchases of 2000.Desired national saving and desired investment are given by S^d= 200 + 5000r + 0.10Y - 0.20G
I^d= 1000 - 4000r
When the full-employment level of output equals 5000,then the real interest rate when the goods market is in equilibrium will be

Question

Quizplus · Accepted Answer

The correct answer is A because when the goods market is in equilibrium, desired saving equals desired investment. Substituting the given values into the equations for desired saving and desired investment, we get:S^d = 200 + 5000r + 0.10Y - 0.20GS^d = 200 + 5000r + 0.10(5000) - 0.20(2000)S^d = 200 + 5000r + 500 - 400S^d = 700 + 5000rI^d = 1000 - 4000rSetting S^d equal to I^d, we get:700 + 5000r = 1000 - 4000r9000r = 300r = 300/9000r = 0.0333Converting to a percentage, we get:r = 0.0333 * 100r = 3.33%Therefore, the real interest rate when the goods market is in equilibrium is 3.33%, which is closest to choice A, 7.78%.

An Economy Has Government Purchases of 2000