1. Finish your project. It is due at the beginning of class on Thursday, March 15.

Practice problem (this will NOT be graded): Consider the following simple Keynesian macroeconomic model of the U.S. economy. [Macro data set]

Y

_{t}= CO_{t}+ I_{t}+ G_{t}+ NX_{t}COt = β

_{0}+ β_{1}YD_{t}+ β_{2}CO_{t-1}+ ε_{1t}YD

_{t}= Y_{t}– T_{t}I

_{t}= β_{3}+ β_{4}Y_{t}+ β_{5}r_{t-1}+ ε_{2t}r

_{t}= β_{6}+ β_{7}Y_{t}+ β_{8}M_{t}+ ε_{3t}

where:

Y

_{t}= gross domestic product (GDP) in year t

CO_{t}= total personal consumption in year t

I_{t}= total gross private domestic investment in year t

G_{t}= government purchases of goods and services in year t

NX_{t}= net exports of goods and services (exports - imports) in year t

T_{t}= taxes in year t

r_{t}= the interest rate in year t

M_{t}= the money supply in year t

YD_{t}= disposable income in year t

Endogenous variables: Y_{t}, YD_{t}, CO_{t}, I_{t}, r_{t},

Exogenous and predetermined variables: G_{t}, NX_{t}, T_{t}, M_{t}, CO_{t-1}, and r_{t-1}

(a) Using OLS, estimate equations for CO_{t} and I_{t}.

(b) Using 2SLS, estimate equations for CO_{t} and I_{t}.

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