Intro to Mathematical Economics.

Chapter 6. Comparative Statistics

Problem 3 We are now going to go to the national income model, and add a financial market to it. In the financial markets, as a nation, we borrow to invest. This means that the demand for investment, I, is now endogenous, and is a function of the real interest rate, Ro, which is exogenous. The system of equations is now Y = C+I+Go C=a+B(Y -T) (a > 0;00;0 0;0 > 0). (a) Solve the system of equations and get the equilibrium expressions of the endogenous variables in terms of the exogenous variables and the parameters. (b) Find the partial effects of government expenditure, Go, on both equilibrium income, Y*, and equilibrium consumption, C"*. Can you sign them? Do they differ at all from those we got in equations (9) and (12)? (c) Find the partial effects of Ro on Y* and C*. Can you sign these partial effects