Question: Class Exercise: Consider the following demand-and-supply model for loans of commercial banks to businesses: Demand: Q d t = 1 + 2 R

Class Exercise: Consider the following demand-and-supply model for loans of commercial banks to businesses:

Demand: Q^d_t = α₁ + α₂R_t + α₂RD_t + α₄IPI_t + u_1t

Supply: Q^s_t= β₁ + β₂R_t + β₃RS_t + β₄TBD_t + u_2t

Where Q = total commercial bank loans ($billion); R = average prime rate; RS = 3-month Treasury bill rate; RD = AAA corporate bond rate; IPI = Index of Industrial Production; and TBD = total bank deposits.

a. Collect data on these variables for the period 1980–2007 from various sources, such as www.economagic.com, the website of the Federal Reserve Bank of St. Louis, or any other source.

b. Are the demand and supply functions identified? List which variables are endogenous and which are exogenous.

c. How would you go about estimating the demand and supply functions listed above? Show the necessary calculations.

d. Why are both R and RS included in the model? What is the role of IPI in the model?

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