Mathematical Ecos 3
CHAPTER 5B: Solving Matrix Models
We have our model that we convert to matrix form.
We then need to solve for the endogenous variables.
How to solve for the system
1. Inverse Method
2. Cramer’s Rule
3. Using eigenvalues and eigenvectors
5.4 Finding the Inverse of a Matrix
[Link] the cofactors of the entire matrix (all elements).
[Link] now have a matrix of cofactors.
[Link] the transpose of the cofactor matrix. This transposed matrix
is called the adjoint of the matrix (adj A).
[Link] the determinant of the matrix.
[Link] the inverse of the determinant.
[Link] find the inverse use the formula:
1 1
A adj A
A
NB! Only this method is acceptable to calculate inverse!
1. Calculate the inverse of
We calculated the det A (see lecture 5A) = 11
adj A =
=
Think box for cofactors:
= For a : eliminate row 1 col 1 (no change in sign)
; left with 4
11
For a12 : eliminate row 1 col 2 (change the sign)
; left with -1, then change sign to +1
For a21 : eliminate row 2 col 1 (change the sign)
; left with 3, then change sign to -3
For a22 : eliminate row 2 col 2 (no change in sign)
; left with 2
2. Calculate the inverse of A=
Det A = -12
Think box for cofactor of a11:
eliminate row 1, col 1 (no change in sign)
=
=
5.5 Cramer’s Rule
For Ax=y, A is a square matrix and non-singular, the solution for the i th endogenous variable xi is:
Ai is just A, but replace the ith column with the y vector of exogenous variables.
Example
X=1000-20E+0.2YF
M=450+10E+0.15YD
X=M
Where:
X= exports
M=imports
E=exchange rate
YF = exogenous foreign income
YD = exogenous domestic income
a. Calculate . What does this represent? Interpret fully. [4]
b. Set the system of equations into a matrix system where X, M and E are the endogenous variables. [6]
c. Using Cramer’s Rule, solve for X, M and E. [16]
d. Suppose that foreign income increases by R100 and domestic income increases by R200. Calculate the change in equilibrium
exports. [4]
a. M=450+10E+0.15YD
b.
Set the system of equations into a matrix system where X, M and E are the endogenous variables.
X + 20E + 0 = 1000+0.2YF
0 – 10E + M = 450 + 0.15YD
X+ 0 -M=0
c.
=20+10 = 30
= 0 - 0 - 1*[-10(1000+0.2YF)-20(450 + 0.15YD)]
=19 000 + 2YF + 3YD
30
= 1*[1(1000+0.2YF)-0(450 + 0.15YD)] – 0 +(-1)*[450+0.15YD]
=1000 + 0.2YF - 450 - 0.15YD
= 550 + 0.2YF - 0.15YD
30
= 1[20(450 + 0.15YD)-(-10)(1000+0.2YF)]
=19 000 + 2YF + 3YD
M
d.
Original:
With the change only
= -[20(-10) – 20(30)]
=800
X =
NB! New X =old X + X
=