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PART ONE: Simultaneous Equations Models a) consider the following system of equation that describes a model for the total aggregate supply of new motor
PART ONE: Simultaneous Equations Models a) consider the following system of equation that describes a model for the total aggregate supply of new motor vehicles in Zambia Qata+BP + y St + ut est = 2 + UP +TE+vt Qat quantity of new cars demanded for at a given time t Qst quantity of new cars supplied at a given time t Pt = (average) price of new cars prevailing at time t St price of a substitute (used cars) T+= some variable embodying the state of Car technology, uand v are error terms. i. Obtain the reduced form equations for this system ii. Which parameters are "identified," in the simultaneous equations sense? Explain your reasoning iii. Below is the Keynesian model of income determination: Income identity: Y = Ct + It + G Investment Function: It =o + Yt-1 + U2t Consumption function:: C = B + B2Yt - B3T + ut Tax Function: T = Yo+Y + u3t In the model the endogenous variables are C, I, T, and Y and the predetermined variables are G and Y-1. By applying the order condition, check the identifiability of each of the equations in the system and of the system as a whole. What would happen if rt, the interest rate, assumed to be exogenous, were to appear on the right-hand side of the investment function? 5
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