Question

Consider a closed economy whose desired savings (Sᵈ ) and desired investment (Iᵈ ) are given by the following expressions:

Sᵈ = 100+600r
Iᵈ = 170−400r
​ where r denotes the real interest rate. Find the equilibrium in the Goods market for this economy, and represent it in a graph.

Answer 1

To find the equilibrium in the goods market for this closed economy, set the desired savings equal to the desired investment and solve for the real interest rate. The equilibrium interest rate is 0.15 or 15%. Represent the equilibrium on a graph by plotting the desired savings and desired investment as functions of the real interest rate.

Step-by-step explanation:

To find the equilibrium in the goods market for this closed economy, we need to set the desired savings equal to the desired investment. In this case, the desired savings is given by the expression Sᵈ = 100+600r and the desired investment is given by Iᵈ = 170−400r. Setting these two equal to each other, we can solve for the real interest rate. By solving, we find that the equilibrium interest rate is 0.15 or 15%. To represent this equilibrium on a graph, we can plot the desired savings and desired investment as functions of the real interest rate, with the interest rate on the x-axis and the amount of savings and investment on the y-axis.