Consider the following demand-and-supply model for money:

Where

M = money

Y = income

R = rate of interest

P = price

Assume that R and P are predetermined.

a. Is the demand function identified?

b. Is the supply function identified?

c. Which method would you use to estimate the parameters of the identified equation(s)? Why?

d. Suppose we modify the supply function by adding the explanatory variables Y_tˆ’1 and M_tˆ’1. What happens to the identification problem? Would you still use the method you used in (c)? Why or why not?

Transcribed Image Text:

Demand for money: Supply of money: M = Bo + B1Y1 + B2 Rq + B3P; +u1! = a0 + aj Y, +u2t