An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by C^d⁼ 3000 - 2000r + 0.10Y
I^d= 1000 - 4000r
Where Y is output and r is the real interest rate.The real interest rate that clears the goods market is equal to

Question

Quizplus · Accepted Answer

To find the real interest rate that clears the goods market, we need to find the level of output where total desired spending (government purchases, consumption, and investment) equals full-employment output.

Total desired spending is equal to:

1000 + (3000 - 2000r + 0.10Y) + (1000 - 4000r)

Simplifying, we get:

5000 - 6000r + 0.10Y

Setting this equal to full-employment output (5000), we get:

5000 - 6000r + 0.10Y = 5000

Solving for r, we get:

r = 0.00833 or 8.33%

Therefore, the real interest rate that clears the goods market is 8.33%.

An Economy Has Full-Employment Output of 5000