Private saving in an economy is given by Sv = 200 + 5r, where r is the real rate of interest. Net taxes are 300 and government purchases are 400, while govt transfer payments are 100.

Private saving in an economy is given by Sv = 200 + 5r, where r is the real rate of interest. Net taxes are 300 and government purchases are 400, while govt transfer payments are 100. This country lends 200 internationally each year, and investment is given by I = 1200 – 5r. Finally, the inflation rate in this economy is 8%. According to the loanable funds theory of interest, what is the equilibrium value for the real interest rate?

Solutions

Expert Solution

At eqm, National saving S = I + NCO

National saving = public saving + private saving

= (T-G-TR) + Sv

= (300-400-100) + 200+5r

= 5r

NCO : net capital outflow = -200

so at eqm

5r = 1200-5r -200

10r = 1000

r = 100

= 100/100 = 1%

Rahul Sunny answered 2 years ago

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Question

Private saving in an economy is given by Sv = 200 + 5r, where r is the real rate of interest. Net taxes are 300 and government purchases are 400, while govt transfer payments are 100.

Solutions

Expert Solution

Related Solutions

Given the following economic information for Country A (in RM billion): Saving (S) = –500 + 0.3Yd Investment (I) = 400 – 200r Government spending (G) = 500 Taxes (T) = 200