Question

Consider a closed economy, where output equals the full employment level of output Y=¯Y=4000, and G=0,C^d=-1000r+0.75Y,I^d=1200-4000r

Question 19: The equilibrium real interest rate is:

A. less than or equal to 2%

B. more than 2%, but less than or equal to 3%

C. more than 3%, but less than or equal to 4%

D. more than 4%, but less than or equal to 5%

E. more than 6%

Question 20: The desired investment is:

A. less than or equal to 1000

B. more than 1000, but less than or equal to 1050

C. more than 1050, but less than or equal to 1100

D. more than 1100, but less than or equal to 1150

E. more than 1150

Answer 1

Ans. 19, C. more than 3%, but less than or equal to 4%

Output at the full employment level, Y = $4000,G=0, C^d=-1000r + 0.75Y and I^d=1200- 4000r

At the full employment level, Y = C^d+I^d+G

4000= -1000r + 0.75Y+ 1200-4000r

4000= -1000r +0.75 x 4000 + 1200 -4000r

4000 = -5000r +3000+1200

5000r= 4200 -4000

5000r = 200

r = 200/5000

r =0.04 or 4 %

hence, the equilibruim interest rate is 4%

Ans.20, B. more than 1000, but less than or equal to 1050

when r = 4%

I^d = 1200 - 4000 x 4 %

I^d = 1200 - 160

I^d = $ 1040

hence, the desired investment is $1040