Consumption C=40+0.75Y Investment I= 140-10i Government Expenditure G=100 Tax T=80 Money Demand : Md = 0.2Y-5i Money Supply : Ms=85 (i is % interest rate; other figures in Rs. Crores) Find out the equilibrium income, Y and interest rate i.
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From above information :-
Consumption C = 40+0.75Y
Investment I = 140-10i
Money demand Md = 0.2Y-5i
Money supply Ms = 85
Equilibrium Income
AS=AD
Y=C+I
=> Y = 40+0.75+140-10i
=> Y = 0.75Y=40+140-10i
=> Y = 0.75Y=40+130
0.25Y=170
=> 170/0.25
=> 680 crores.
Interest rate
Set money demand equals to money supply
=> 0.2Y-5i=85
=> 0.2(680-5)=85
=> 0.2(675)=85
135/85
=> 1.5%
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