The following table presents the data for an economy when the government’s budge
ID: 1111346 • Letter: T
Question
The following table presents the data for an economy when the government’s budget is balanced.
Real interest rate
(percent per year)
Loanable funds demanded
(billions of 2007 dollars)
Loanable funds supplied
(billions of 2007 dollars)
2
3
4
5
6
7
8
9
10
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Calculate the equilibrium real interest rate, investment, and private saving. Why is this interest rate referred to as equilibrium?
Real interest rate
(percent per year)
Loanable funds demanded
(billions of 2007 dollars)
Loanable funds supplied
(billions of 2007 dollars)
2
3
4
5
6
7
8
9
10
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Explanation / Answer
The equilibrium real interest rate will be determined at an interest rate where demand for the loanable fund is equal to the supply of loanable fund.
As it can be seen in the table at real interest rate 5% demand for the loanable fund is equal to the supply of loanable fund. Therefore the real interest rate is 5% per year.
The Investment level will be $6 billion.
Since it is given that government budget is balanced. It means T-G=0. Therefore public saving is 0.
Investment = National saving = $6 billion
National saving =$6 billions.
Public saving + private saving = $6 billions
0 + private saving =$6 billions
Private saving = $6 billion- 0
Private saving =$6 billion
The interest rate is in equilibrium because at this rate of interest demand for the loanable fund is equal to the supply of loanable fund.
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