You are given the following information about the commodity and Money
markets of a closed economy without government intervention.
The commodity market
Consumption function:
C = 50 + 2/5Y
Investment function:
I = 790 – 21r
The Money Market
Precautionary and Transactions demand for money
MDT = 1/6 Y
Speculative demand for money
MDS = 1200 -18r
Money supply
MS = 1250
Required:
i) Determine the equilibrium levels of income and interest rate for this
economy. (10 marks)
ii) Using a well labeled diagram, illustrate the equilibrium condition in part (i)
above. (5 marks)