Scenario 26-2.Assume the following information for an imaginary,closed economy.
GDP = $5 trillion;consumption = $3.1 trillion;
government purchases = $0.7 trillion;and taxes = $0.9 trillion.
-Refer to Scenario 26-2.Suppose,for this economy,the relationship between the real interest rate,r,and investment,I,is given by the equation I = 10.78 - 3.03r.(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)3.19 percent.
B)3.00 percent.
C)3.16 percent.
D)7.14 percent.

Question

Quizplus · Accepted Answer

To find the equilibrium real interest rate, we need to calculate national saving, which is equal to investment in a closed economy. National saving is GDP - consumption - government purchases, which is $5 trillion - $3.1 trillion - $0.7 trillion = $1.2 trillion. Setting this equal to the investment equation, $1.2 trillion = 10.78 - 3.03r, solving for r gives r = 3.16 percent.