Consider the following extended Keynesian model of income determination:

Where

C = consumption expenditure

Y = income

I = investment

T = taxes

G = government expenditure

u€™s = the disturbance terms

In the model the endogenous variables are C, I, T, andY and the predetermined variables are G and Y_tˆ’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 r_t, the interest rate, assumed to be exogenous, were to appear on the right-hand side of the investment function?

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Consumption function: Investment function: Taxation function: Income identity: C; = B1 + B2Y, – B3T, + u11 I = a0 + ajY,-1 +u21 T; = Yo + YiY, + U 31 Y; = C; + I, + G,