# A181_answer.docx - A181 QUESTION ONE(45 MARKS A...

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A181 QUESTION ONE (45 MARKS) A two-equation model below represent goods sector and monetary sector equilibrium for a hypothetical economy: r f g f e L Y r C b C I Y . ) 2 ( . 1 1 ) 1 ( 0 0 . 0 , 0 , 0 , 0 , 1 0 , 0 , 0 0 0 e g f L c b I As usual, Y is aggregate income, r is the interest rate, I 0 is the autonomous investment, and L 0 is the level of money supply. i. List down the endogenous variables and the exogenous variables of the model. (2marks)
ii. Which equation represent the IS and which represent the LM? (2 marks) iii. Justify your answers found in ii). (4 marks)
iv. Find the equilibrium of the economy. (6marks)
v. Suppose now, the monetary authority decides to increase the quantity of money supply to a new level, evaluate the effect of such changes to the economy. (8 marks) vi. Now, rewrite the equation (1) and (2) respectively in their implicit-forms equivalence. (4 marks)