Consider the following modified Keynesian model of income determination:

where C = consumption expenditure

I = investment expenditure

Y = income

G = government expenditure

G_t and Y_tˆ’1 are assumed predetermined

a. Obtain the reduced-form equations and determine which of the preceding equations are identified (either just or over-).

b. Which method will you use to estimate the parameters of the overidentified equation and of the exactly identified equation? Justify your answer.

Transcribed Image Text:

C; = B10 + B1Y, + u, I, = B20 + B21 Y,+ B22 Y,–1+ U2: Y, = C, + I; + G, %3D