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What is the equilibrium condition in the money market?

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1(a) Given the national income model Y = C + I + G where C = 100 + 0.75Y, I = 120 - 20i, G= 80, derive an expression for equilibrium in the goods market in the form i = f(Y).

(b) Given the money demand function, MD = 600 + 0.4Y - 40i, and supply function, MS = 900, derive an expression for equilibrium in the money market in the form i = f(Y).

(c) Graph both equations on the same diagram, showing the intercepts and slope.

(d) Using Cramer's rule find the level of income and the interest rate for which the economy is in equilibrium and show them on your diagram in (c)

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This solution uses Cramer's rule to determine the equilibrium condition in an attached Word and Excel file.

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Answer:
We have,
Y=C+I+G
Where,
C=100+0.75Y
I=120-20i

And,
G=80

Adding all we ...

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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