Answer to Question #63293 in Macroeconomics for Sharon

Question #63293
You are given the following information of commodity market and money market of a closed economy without government intervention. The commodity market consumption function ​C = 50 + 2Y ​5 Investment function​ I = 790-21r Money Market: Precautionary and Transaction demand for money. MDT =​ 1Y ​6​ Speculative demand MDS= 1200-16r Money supply MS= 1250 1. Determine the; i) Equilibrium level of income. ii) Interest rate for this economy. 2. Using a well labeled diagram, Illustrate the equilibrium condition in part i) above.
1
Expert's answer
2016-11-14T09:55:12-0500
C = 50 + 2/5Y, I = 790 – 21r
MDT = 1/6 Y, MDS = 1200 -18r, MS = 1250
In equilibrium Y = C + I and MD = MDT + MD­S = MS, so:
50 + 2/5Y = 790 – 21r
1/6 Y + 1200 - 18r = 1250,
2/5Y + 21r = 740
1/6Y - 18r = 50 -> 2/5Y - 43.2r = 120, so if we subtract second equation from the first, we will get:
64.2r = 620
r = 9.66%
Y = (740 - 21*9.66)/0.4 = $1343
So, r = 9.66% and Y = $1343 are the equilibrium levels of income and interest rate for this economy.

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