Consider the following model:
Rt = A1 + A2Mt + A3Yt + u1t
Yt = B1 + B2Rt + u2t
where Y = income (measured by gross domestic product, GDP), R = interest rate (measured by 6-month Treasury bill rate, %), and M = money supply (measured by Ml). Assume that M is determined exogenously.
a. What economic rationale lies behind this model? (Hint: See any macroeconomics textbook.)
b. Are the preceding equations identified?
c. Using the data given in Table 11-2 (on the textbook's Web site), estimate the parameters of the identified equation(s). Justify the method(s) you use.