question3

Question III Consider the two-equation causal/ structural model: Y1 = 202Y2+51 (1) Y1 = 5 + Y2 + 82 (2) where 51 and 52 are independent standard normal. To help you understand the equation system, you can think of the rst equation as the demand curve where Y1 is the demand and Y2 is the price, and the second equation as the supply curve where Y1 is the supply and Y2 is the price. 1. Solve Y1 and Y2 in terms of (51,52). 2. Find cov (It/2,51) and cm) (13,52). 3. Given some iid draws (81,, 52,-) , the two-equation system produces the observations (YM, I'm-)2; . Let [30135 be the OLS estimator obtained by regressing Y1 on a constant and Y2. What do you expect 50,33 to be when n > oo? 4. \"In large samples, we expect BOLS to fall in the interval [-2,1]\". Do you agree with this statement? Explain