Question: Suppose you estimate the consumption function: Yi =a1 +a2Xi +u1i and the savings function: Zi =b1 +b2Xi +u2i where Y = consumption, Z = savings,

Suppose you estimate the consumption function:

Yi =a1 +a2Xi +u1i and the savings function:

Zi =b1 +b2Xi +u2i

where Y = consumption, Z = savings, X = income and X = Y + Z.

(i) What is the relationship, if any, between a2 and b2? Show your calculations. (ii) Will the RSS be the same for the two models? Explain.

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