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Suppose an inflationary economy can be described by the following equations representing the goods and money...

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Economics

Suppose an inflationary economy can be described by thefollowing equations representing the goods and money markets:

C = 20 + 0.7Yd

M = 0.4Yd

I = 70 – 0.1r

T = 0.1Y

G = 100

X = 20

Ld = 389 + 0.7Y – 0.6r

Ls = 145

where G represents government expenditure, M is imports, X isexports, Y is national income, Yd is disposable income, T isgovernment taxes (net of transfer payments), I is investment, r isthe rate of interest, C is consumption, Ld is money demand, and Lsis money supply.

i) Use the inverse matrix method to solve for the equilibriumlevel of national income and the equilibrium rate of interest inthis economy. (Note: ½ of the marks in this part are given for thecorrect set up of the equations. Explain what you are doing,including how equilibrium is established in each market.)

ii) Now use Cramer’s rule to find your answer.

Answer & Explanation Solved by verified expert
4.3 Ratings (902 Votes)
Let us form the formula for IS and LM curve from the aboveformula Then we will create a 22 matrix to resolve the value of Yand rWe confirm that goods market is in equilibrium    See Answer
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