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Consider an economy made up of two sectors: the real goods sector and the monetary

sector. The goods market involves the following equations:

Y = C + I + G

C = ? + ?Y

I = ? ? ?i

G = G0

where Y, C, I, G are respectively aggregate income, consumption expenditure, investment

expenditure and government expenditure. The money market involves the following equa-

tions:

Md = Ms

Md = kY ? li

Ms = M0

where Md and Ms are respectively the demand for money and the supply of money.

(a) Identify all the endogenous and exogenous variables from these two markets.

(b) What are the structural parameters in the models.

(c) Write the two models in a matrix form.

(d) Use the Laplace expansion method to find the determinant of the coefficient matrix

formed in (d).

(e) Use Cramer?s rule to find the equilibrium income (Y

?

).

(f) Find the money supply multiplier.

(g) Find the government expenditure multiplier.

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