10. Assume the IS-LM closed-economy model, in which the following behavioural equations fully describe the goods market:

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10 Assume The Is Lm Closed Economy Model In Which The Following Behavioural Equations Fully Describe The Goods Market 1 (54.1 KiB) Viewed 23 times

10. Assume the IS-LM closed-economy model, in which the following behavioural equations fully describe the goods market: ZEC+I+G C = 4+GY I = 22 + , Y - azi where z defines aggregate demand, C consumption, I investment, G government spending, i is the nominal interest rate set by the central bank, and Yis disposable income, defined by Yº =Y-T. where T = T, defines taxes (net of transfers, given), and ca. > 0 the autonomous parts of consumption and investment, respectively, G E (0,1) the marginal propensity to consume, as (0,1) the impact of output on investment, and a > 0 the interest sensitivity of investment . It is also assumed that a,+< < 1. The financial markets are described by the following equation: Md = d.Y - det where defines real money balances, so M is money and the price level in the economy, assumed to be constant, and d,,d,> 0 the impact of output on the demand for real money balances and the interest sensitivity of the demand of real money balances Further, assume that G = Ge and i = 1, being set by the government and the central bank, respectively. (a) Assuming simultaneous equilibrium in the goods and the financial markets, le. Y = Z and define the endogenous variables and the exogenous variables and exogenously given parameters in this model. (6 marks) EC208 2021/2 A 800 Turn over Page 7 (b) Write the system of equations in matrix form, and define the coefficient matrix, the matrix of endogenous variables and the matrix of the exogenous variables and the exogenously given parameters (6 marks) (c) Solve for output, Y. and real money balances by the use of Cramer's rule (10 marks) (d) Operate a comparative-static analysis to output and real money balances regarding the two policy instruments namely, government spending. Go and the nominal interest rate, 8 marks