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 â€“ 0.1r
T = 0.1Y
G = 100
X = 20
Ld = 389 + 0.7Y â€“ 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: Â½ 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 Cramerâ€™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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