1. [IS-LM Model - II]Let the IS equation be given asY =thenA1-bwhere 1-b is the marginal propensity to save, g is the investment sensitivity to theinterest rate i, and A is an aggregate of exogenous variables.Let the LM equation beY91-bTMo 1+-1,kwhere k and I are income and interest sensitivity of money demand, respectively andMo is is the real money balances.Ifb = 0.7, g = 100, A = 252, k = 0.25,7 = 200, and Mo = 176,(a) Write the IS-LM system in matrix form.(b) Solve for Y and i by matrix inversion. Recall the formula for matrix inversionin the 2 x 2 case discussed in class.(c) Solve for Y and i by Cramer's rule.

IS curve is the goods market equilibrium and the LM curve is the money market equilibrium.For IS…

then (a) Write the IS-LM system in matrix form. (b) Solve for Y and i by matrix inversion. Recall the formula for matrix inversion in the 2 x 2 case discussed in class. (c) Solve for Y and i by Cramer's rule.

then (a) Write the IS-LM system in matrix form. (b) Solve for Y and i by matrix inversion. Recall the formula for matrix inversion in the 2 x 2 case discussed in class. (c) Solve for Y and i by Cramer's rule.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

1. [IS-LM Model - II]
Let the IS equation be given as
Y =
then
A
1-b
where 1-b is the marginal propensity to save, g is the investment sensitivity to the
interest rate i, and A is an aggregate of exogenous variables.
Let the LM equation be
Y
9
1-b
T
Mo 1
+-1,
k
where k and I are income and interest sensitivity of money demand, respectively and
Mo is is the real money balances.
If
b = 0.7, g = 100, A = 252, k = 0.25,7 = 200, and Mo = 176,
(a) Write the IS-LM system in matrix form.
(b) Solve for Y and i by matrix inversion. Recall the formula for matrix inversion
in the 2 x 2 case discussed in class.
(c) Solve for Y and i by Cramer's rule.

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