C, = a, + a,Y, + a,C,, + H 1, = B, + B,K, + B,P, + M2 Y, = C, + 1, +G, Where the error terms follow ideal conditions but cov(4,, 4,2 | X) # 0 (I am using X to denote all exogenous and predetermined regressors in the model). a. Derive the reduced for equation for Y,. b. Suppose that we estimate the consumption function by OLS. What ideal conditions are we violating and what are the consequences? Would your answer change if cov(4,, 4,2 | X)= 0 ? Explain.

C, = a, + a,Y, + a,C,, + H 1, = B, + B,K, + B,P, + M2 Y, = C, + 1, +G, Where the error terms follow ideal conditions but cov(4,, 4,2 | X) # 0 (I am using X to denote all exogenous and predetermined regressors in the model). a. Derive the reduced for equation for Y,. b. Suppose that we estimate the consumption function by OLS. What ideal conditions are we violating and what are the consequences? Would your answer change if cov(4,, 4,2 | X)= 0 ? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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