## Info

is an input price vector. What is the interpretation of w' Ay? Is it a scalar or a matrix?

4. Suppose that the markets for coffee and sugar are characterized by the following demand and supply relationships:

Dy = 80 - 4 pK - 2 pc. i, =-10+ p, where p, is the price of coffee and py is the price of sugar.

(a) Set up the system in equilibrium as a matrix equation

Ap = b where A is a 2 x 2 matrix of coefficients, p is a 2 x I vector of prices, and 1) is a 2 x 1 vector of constants.

(b) Solve for the equilibrium prices of coffee and sugar.

5. Solve for the equilibrium levels of Y and R in the extended IS-LM model that allows for imports and exports. The model is given by

C = 15 + 0.8< Y -T) T = -25 + 0.25 Y I = 65 - R C = 94

where C is consumer expenditure. T is tax revenue, Y is aggregate output, / is investment expenditures, R is the interest rate, G is government expenditure, and A' is net exports (exports minus imports).

The money market (the LM part of the model) is described by

In this model, we are not imposing baJanee-of-payments equilibrium (compare with example 7.16). Calculate the government's budget deficit (or surplus) in the equilibrium. Calculate the uadc deficit (or surplus) in the equilibrium.