The investment function intersects the saving schedule at an interest rate of 8 percent and a level of investment of $1.2 trillion a year. If the consumption curve intersects the 45-degree reference line at $3 trillion, then
A)the C + I curve will intersect the 45-degree reference line at $1.2 trillion.
B)the C + I curve will intersect the 45-degree line at $1.8 trillion.
C)the equilibrium level of real GDP is $1.8 trillion.
D)the equilibrium level of real GDP is $4.2 trillion.

Question

Quizplus · Accepted Answer

At an interest rate of 8 percent, the investment level is $1.2 trillion a year, and the consumption level is $3 trillion. Therefore, total spending (C + I) is $4.2 trillion. This total spending intersects the 45-degree reference line, indicating that the equilibrium level of real GDP is $4.2 trillion. Therefore, choice D is the best answer.

The Investment Function Intersects the Saving Schedule at an Interest