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Consider the following demand-and-supply model for money: Demand for money: Md = β0 + β1 Y1 + β2 Rt + β3 Pt + u1t Supply of money:     Ms = α0 + α1 Yt + u2t

where M = money
Y = income
R = rate of interest
P = price
Assume that R and P are predetermined.

a. Is the demand function identi?ed?

b. Is the supply function identi?ed?

c. Which method would you use to estimate the parameters of the iden- ti?ed equation(s)? Why?

d. Suppose we modify the supply function by adding the explanatory variables Yt-1 and Mt-1. What happens to the identi?cation problem? Would you still use the method you used in c? Why or why not?

Microeconomics, Economics

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