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.
