For a closed economy, private saving is 1300 and the government is running a budget surplus...

For a closed economy, private saving is 1300 and the government is running a budget surplus of 700. The investment function is I=5000 -100r, where r is the country’s real interest rate, expressed as percentage. The equilibrium interest rate is?

Expert Solution

We know, fiscal deficit = savings - investment.

But here we have a budget surplus, which can be written as : budget surplus = -fiscal deficit.

The budget surplus is a negative fiscal deficit.

Therefore, we can put the equation like this:

-700 = 1300 - (5000-100r)

-700 = -3700 + 100r

3000 = 100r

r = 30%

Rahul Sunny answered 2 years ago

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