The table shows a private closed economy. All figures are in billions of dollars. Refer to the table above. If the real rate of interest is 2%, then the equilibrium level of GDP will be:
A) $800 billion
B) $1000 billion
C) $1200 billion
D) $1400 billion

Question

The table shows a private closed economy. All figures are in billions of dollars.  Refer to the table above. If the real rate of interest is 2%, then the equilibrium level of GDP will be:
A) $800 billion 
B) $1000 billion 
C) $1200 billion 
D) $1400 billion

Quizplus · Accepted Answer

In a private closed economy, the equilibrium level of GDP is where saving equals investment. In this case, saving is equal to $400 billion ($200 billion by households and $200 billion by firms) and investment is also equal to $400 billion. At a 2% real interest rate, the investment demand is $600 billion. As this exceeds the $400 billion savings, the economy will have to produce more output to fulfill this demand, leading to an increase in GDP. The new equilibrium level of GDP can be found using the formula: GDP = C + I + G. Plugging in the values, we get: 
GDP = $600 billion (investment) + $400 billion (consumption) + $200 billion (government spending) 
GDP = $1200 billion. Therefore, the equilibrium level of GDP is $1200 billion.

The Table Shows a Private Closed Economy