For the commodity market C=aY+b (00) 1 = cr+d (c<0,d > 0) For the money market Ms = Mo M₁ = k₁Y+k₂r+k₂ (k₁, k₂ > 0, k₂ <0) D (i) Show that when the commodity and money markets are both in equilibrium, the income, Y, and interest rate, r, satisfy the matrix equation 1-a -c b+d k₁ k₂ M₁-k Hint: Commodity market equilibrium implies Y=C+I and money market equilibrium implies M, M, (i.e. money demand equals money supply). (15 Marks) (12 Marks) and deduce that the interest 1 (6.3 Marks). (ii) Using Cramer's rule, solve for the equilibrium interest rate, r. dr (iii) Find the multiplier for r due to changes in Mo, i.e.- ƏM rate falls as the money supply grows.
