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Cramers rule is a method of solving a system of linear equations through the use of
determinants.
Matrices and Determinants
To use Cramers Rule, some elementary knowledge of matrix algebra is required. An
array of numbers, such as
6
a11 a12
A=
3 4
a21 a22
is called a matrix. This is a 2 by 2 matrix. However, a matrix can be of any size, defined by
m rows and n columns (thus an m by n matrix). A square matrix, has the same number of
rows as columns. To use Cramers rule, the matrix must be square.
A determinant is number, calculated in the following way for a 2 by 2 matrix:
a11
a12
A =
A =
= 6 (4) - 3 (5) = 9
3
For m by n matrices of orders larger than 2 by 2, there is a general procedure that can be
used to find the determinant. This procedure is best explained as an example. Consider the
determinant for a 3 by 3 matrix
A =
a22 a23
a31 a23
a21 a22
- a12
+ a13
a31 a33
a31 a32
note the sign change
A = a11
a32 a33
A = a11 (a22 a33 - a23 a32) - a12 (a21 a33 - a23 a31) + a13 (a21 a32 - a22 a31)
Figure 2
Figure 3
Figure 1
For an example, consider:
A=
5 6 7
2 1 4
9 6 3
Find the determinant A .
Determinant A is calculated as follows:
1 4
A = 5
2 4
- 6
6 3
2 1
+ 7
9 3
9 6
Ai
A
x = d
x1
d1
x2 = d2
A is the matrix corresponding to the number of equations in a system (here, two equations),
and the number of endogenous variables in the system (here 2 variables). Remember that the
matrix must be square, so the number of equations must equal the same number of endogenous
variables. Position x has one column and corresponds to the number of endogenous variables
in the system. Finally, position d contains the exogenous terms of each linear equation.
Note: The determinant for a matrix must not equal 0 ( A 0). If A = 0 then there is no
solution, or there are infinite solutions (from dividing by zero). Therefore, A 0. When A
0, then a unique solution exists.
3
2 6
x1
d
22
=
-1 5
x2
53
2 6
= 2 (5) - (-1) 6 = 16
-1 5
We need to construct
The first special determinant A1 is found by replacing the first column of the primary
matrix with the constant d column. The new special matrix A1 now appears as:
22 6
A1 =
53 5
and solved as a regular matrix determinant,
A1 = 22 (5) - 53 (6) = -208
Likewise, the same procedure is done to find the second special determinant A2,
2 22
A2 =
-1 53
A2 = 2 (53) - (-1) (22) = 128
We have now determined:
4
A = 16
A1 = -208
A2 = 128
Using:
xi =
Ai
A
we get,
x1 =
A1
A =
x2 =
A2
A
-208
16
128
= 16
= -13
= 8
(Solution)
(Solution)
x1
x2
x3
16
2
7
5 -2 3
2 3 -5 = 5(18 - 25) + 2(12 + 20) + 3(-10 - 12) = - 37
4 -5 6
16 -2 3
2 3 -5 = 16(18 - 25) + 2(12 + 35) + 3(-10 - 21) = -111
7 -5 6
A2 =
5
2
4
16 3
2 -5 = 5(12 + 35) - 16(12 + 20) + 3(14 - 8) = -259
7 6
A3 =
5
2
4
-2 16
3 2 = 5(21 + 10) + 2(14 - 8) + 16(-10 - 12) = -185
-5 7
-111
= -37 = 3
x2 =
A2
A
-259
= -37 = 7
x3 =
A3
A
-185
= -37 = 5
Applying Cramers Rule to Obtain Comparative Static Multipliers for an IS-LM System
A system of equations can always be presented in the following form,
F 1 ( y1 ,..., yn ; x1 ,..., xm ) 0
F 2 ( y1 ,..., yn ; x1 ,..., xm ) 0
n
F ( y1 ,..., yn ; x1 ,..., xm ) 0
where the n equations implicitly define a set of n functions which determine each of the n
endogenous variables (y1,...,yn) in terms of the m exogenous variables (x1,...,xm).
For example, consider the IS equation Y C (Y T ) I (r , ) G NX and LM
equation PL( r , Y ) M . Assume the output level Y and real interest rate level r are
endogenous. Assume government policy variables are exogenous (because they are
controlled by government), including the level of government purchases G , the level of
taxes T , and the money supply level M . Assume the level of net exports NX is
exogenous, along with the expectations parameter and the price level P . We can
rewrite these IS and LM equations as the system
F 1 (Y , r ; G, T , M , , NX , P ) Y C (Y T ) I ( r , ) G NX 0
F 2 (Y , r ; G, T , M , , NX , P ) PL(Y , r ) M 0
If some technical details are satisfied1, the implicit function theorem tells us that
the endogenous variables Y and r are determined implicitly as functions of the
exogenous variables T , G, M, P, , and, NX , if the Jacobian determinant is not
equal to zero. For the general system, the Jacobian determinant is given by
F 1
y1
F 2
J y
1
F n
y1
F 1
y2
F 2
y2
F n
y2
F 1
yn
F 2
yn
F n
yn
F 1
A Y2
F
Y
F 1
r 1 C ' I r PL [1 C ' ] PI L 0 .
r
r Y
F 2
PLY PLr
r
Notice that differentiating a system in the levels yields a new system in the
differentials. Our new system contains two equations and two endogenous differentials
---dY and dr. This system is linear because the differentials dY and dr only appear as
coefficients. (There is no ln dY , for example, and no dr 2 as another nonlinear
example.) There are multiple ways in to solve this linear system. One method is by using
substitution. Using substitution is easier for systems with fewer equations and fewer
variables. However, it can become a tedious art for more complicated systems. Cramers
Rule is a general, systematic method for solving a linear system.
To use Cramers rule, we must rearrange the linear system so it is the matrix form
Ax=d. The matrix A has n rows and n columns, corresponding to the systems n equations
and n endogenous variables. The vector x has n rows and consists of the systems n
endogenous variables. The vector d has n rows and consists of all terms which do not
contain an endogenous variable. Our system written in this matrix form is
a11 a12 x1 d1
a a x d
21 22 2 2
1 C ' I r dY C' dT I d dG dNX
PL
dr
PL
LdP dM
Y
r
The next step in using Cramers rule is to calculate the determinant A . Notice this
determinant is the Jacobian that we calculated above. From above, we know that
A [1 C ' ]PLr I r PLY 0 .
The next step involves calculating the determinants A1 and A2 , where the
matrix Ai is created by replacing column i in the matrix A by the vector d. For our system
the determinants A1 and A2 are given by
A1
d1
a12
d2
a22
C ' dT I d dG d [ NX ]
Ir
LdP dM
PLr
and
A2
a11
d1
a12
d2
1 C'
C ' dT I d dG d [ NX ]
PLY
LdP dM
The final step in using Cramers rule is to construct the solutions for the endogenous
variables. In general, and for our example system, this is done as follows:
x1 dY
A1
A
PLr I
PLr C '
PLY
PLr
I L
dT
d
dG
d [ NX ] r dP
A
A
A
A
A
Ir
dM
A
PLY C '
PLY I
PLY
PLY
dT
d
dG
d [ NX ]
A
A
A
A
and
x 2 dr
A2
A
[1 C ' ] L
[1 C ' ]
dP
dM
A
A
PLr
PLr
dG
dG
A
[1 C ' ]PLr I r PLY
and
dr
PLY
PLY
dG
dG .
A
[1 C ' ]PLr I r PLY
This implies
dY
dG
1
L
[1 C ' ] I r Y
Lr
and
dr
dG
LY
Lr
LY .
[1 C ' ] I r
Lr
1
[1 C ' ] I r
LY
Lr
and
LY
Lr
L
[1 C ' ] I r Y
Lr
The restrictions LY 0 , Lr 0 , and 0 C ' 1 imply the two multipliers are positive as
shown. These results are telling us that an increase in government purchases will tend to
increase the level of output and increase the real interest rate level. The effect on output is the
standard Keynesian multiplier effect, while the effect on the real interest rate is the standard
crowding out effect. The extent to which there is a multiplier effect versus a crowding out
effect depends upon the magnitudes of LY , Lr , and C ' . A liquidity trap occurs as Lr
becomes large in magnitude (i.e., very negative), and the multiplier Y / G approaches the
simple Keynesian spending multiplier 1 /[1 C ' ] 1 . This is because the multiplier r / G
approaches zero, so no increase in the interest rate level occurs to crowd out investment
spending. Alternatively, as Lr approaches zero, so money demand is not affected by the
interest rate level, which was the Classical assumption prior to Keynes, the multiplier Y / G
approaches zero. This is because the multiplier r / G approaches infinity, so that the
slightest increase in government purchases increases the interest rate level so much that the
increase in government purchases is exactly offset by a decrease in investment.
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