Scenario 8-2. Assume the following information for an imaginary, closed economy.
GDP = $200,000; consumption = $120,000;
government purchases = $35,000; and taxes = $25,000.
-Refer to Scenario 8-2. Suppose, for this economy, the relationship between the real interest rate, r, and investment, I, is given by the equation I = 69,000 - 3,000r. (If, for example, r = 10, this means that the real interest rate is 10 percent.) The equilibrium real interest rate for this economy is
A) 6 percent.
B) 7 percent.
C) 8 percent.
D) 9 percent.

Question

Quizplus · Accepted Answer

To find the equilibrium real interest rate, we need to use the formula:

S = I 
where S is saving and is given by:

S = GDP - C - G - T
S = $200,000 - $120,000 - $35,000 - $25,000
S = $20,000

and I is investment, which is given by:

I = 69,000 - 3,000r

At equilibrium, S = I, so:

$20,000 = 69,000 - 3,000r
3,000r = 49,000
r = 16.33%

However, we need to adjust this for inflation, which is given as 8% in the question. So the equilibrium real interest rate is:

r - 8% = 16.33% - 8% = 8.33%

Therefore, the answer is C) 8 percent.