Consider the following demand-and-supply model for money: Money demand: M d t = β 0 + β
Question:
Money demand: Mdt = β0 + β1Yt + β2Rt + β3Pt + u1t
Money supply: Mst = α0 + α1Yt + u2t
Where
M =money
Y = income
R = rate of interest
P =price
us = error terms
Assume that R and P are exogenous and M and Y are endogenous. The following table gives data on M (M2 definition), Y (GDP), R (3-month Treasury bill rate) and P (Consumer Price Index), for the United States for 19702006.
a. Is the demand function identified?
b. Is the supply function identified?
c. Obtain the expressions for the reduced-form equations for M and Y.
d. Apply the test of simultaneity to the supply function.
e. How would we find out ifY in the money supply function is in fact endogenous?
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