Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is:
A) 2 percent.
B) 5 percent.
C) 10 percent.
D) 20 percent.

Question

Quizplus · Accepted Answer

To find the equilibrium real interest rate, we need to find the point where investment equals savings in the economy. Savings is equal to income minus consumption (S = Y - C).

S = Y - C
S = Y - (500 + 0.6Y)
S = 0.4Y - 500

Setting S equal to investment (I = 2,000 - 100r), we get:

0.4Y - 500 = 2,000 - 100r

Solving for Y, we get:

Y = 5,000

Plugging this value of Y back into the equation for investment, we get:

I = 2,000 - 100r
I = 2,000 - 100(5)
I = 1,500

So at an interest rate of 5%, investment equals savings, which in turn equals the level of GDP (Y) at 5,000. Therefore, the equilibrium real interest rate is 5%.

Assume That Equilibrium GDP (Y) Is 5,000