Assume that a simple economy could be described by the following system of equations, $$\begin{array} { l }
C _ { t } = \beta _ { 0 } + \beta _ { 1 } Y _ { t } + u _ { t } \
I _ { t } = \bar { I }
\end{array}$$
where $C$ is consumption, $Y$ is income, and $I$ is investment. (This may be a primitive island society which does not trade with other islands. There is no government, and the only good consumed and invested (saved) is sunflower seeds.)

Assume the presence of the GDP identity, $Y = C + I$. If you estimated the consumption function, what sort of problem involving internal validity may be present?

Question

Assume that a simple economy could be described by the following system of equations, $$\begin{array} { l } 
C _ { t } = \beta _ { 0 } + \beta _ { 1 } Y _ { t } + u _ { t } \
I _ { t } = \bar { I }
\end{array}$$
where $C$ is consumption, $Y$ is income, and $I$ is investment. (This may be a primitive island society which does not trade with other islands. There is no government, and the only good consumed and invested (saved) is sunflower seeds.)

Assume the presence of the GDP identity, $Y = C + I$. If you estimated the consumption function, what sort of problem involving internal validity may be present?

Quizplus · Accepted Answer

The Answer of Assume that a simple economy could be described by the following system of equations, $$\begin{array} { l } 
C _ { t } = \beta _ { 0 } + \beta _ { 1 } Y _ { t } + u _ { t } \
I _ { t } = \bar { I }
\end{array}$$
where $C$ is consumption, $Y$ is income, and $I$ is investment. (This may be a primitive island society which does not trade with other islands. There is no government, and the only good consumed and invested (saved) is sunflower seeds.)

Assume the presence of the GDP identity, $Y = C + I$. If you estimated the consumption function, what sort of problem involving internal validity may be present?

Assume That a Simple Economy Could Be Described by the Following