Question

The following equations describe an economy. Y = C + I + G C = 100 + 0.80(Y - T) I = 150 - 10r (M/P)d = Y - 50r G = 250 T= 200 M = 3,000 P = 4 What is the equilibrium interest rate?

a. 5%
b. 10%
c. 15%
d. 20%

Answer 1

The equilibrium interest rate cannot be determined with the given information.

Step-by-step explanation:

The equilibrium interest rate can be determined by setting the quantity of money demanded equal to the quantity of money supplied. In this case, the money demand equation is given as (M/P)d = Y - 50r, where M/P is the real money supply, Y is the level of output, and r is the interest rate. The money supply is given as M = 3000 and the price level is given as P = 4. We can plug in these values and solve for r:

3000/4 = Y - 50r
750 = Y - 50r
50r = Y - 750
Let's substitute Y = C + I + G:
50r = (100 + 0.80(Y - T)) + (150 - 10r) + 250 - 750
50r = 100 + 0.80(Y - T) + 150 - 10r + 250 - 750
50r + 10r = 100 + 150 + 250 - 750 - 0.80(Y - T)
60r = -250 - 0.80(Y - T)
The interest rate cannot be determined without knowing the values of output Y and taxes T. Therefore, we cannot answer this question with the given information.