Final answer:
The equilibrium in the goods market of a closed economy is found where desired savings equal desired investment. The equilibrium real interest rate is 0.07, at which the quantity of savings and investment is 142. A shift in the savings curve due to a change in foreign investor perceptions would adjust the equilibrium, typically resulting in a higher interest rate and lower quantity of available loans.
Step-by-step explanation:
To find the equilibrium in the goods market of a closed economy, we use the condition that desired saving (Sᵤ) equals desired investment (Iᵤ). Given the functions Sᵤ = 100 + 600r and Iᵤ = 170 - 400r, we set them equal to each other to find the equilibrium real interest rate (r). The equations then become: 100 + 600r = 170 - 400r which simplifies to 1000r = 70. Solving for r, we get r = 0.07. At this equilibrium interest rate, both savings and investment are balanced at a quantity of 142. To depict this graphically, we would draw the savings function and the investment function on the same graph, with the interest rate on the vertical axis and the quantity of savings and investments on the horizontal axis. The point where the two curves intersect depicts the equilibrium.
Now, considering a shift in the perceptions of foreign investors that leads to a decrease in the supply of loanable funds, this would shift the savings curve to the left by $10 million at every interest rate. This shift means savings at each interest rate is now less by $10 million, which would generally cause the equilibrium interest rate to rise because the reduced savings would induce lenders to offer loans at a higher rate to attract the smaller available funds. We could calculate the new equilibrium by finding the new intersection point of the adjusted savings curve and the unchanged investment curve, which would be at a higher interest rate and a lower quantity of funds available for loans due to the reduced supply of savings.