You have been told that the money demand function in the United States has been unstable since the late 1970. To investigate this problem, you collect data on the real money supply (m=M/P; where M is M₁ and P is the GDP deflator), (real)gross domestic product (GDP)and the nominal interest rate (R). Next you consider estimating the demand for money using the following alternative functional forms:
(i)m = β₀ + β₁× GDP + β₂x R+ u
(ii)m = β₀ × $G D P ^ { \beta 1 }$ x ${ R } ^ { \beta 2 }$ × e^u
(iii)m = β₀ × $G D P ^ { \beta 1 }$ x $1 + R ^ { \beta _ { 2 } }$ × e^u
Give an interpretation for β₁ and β₂ in each case. How would you calculate the income elasticity in case (i)?

Question

You have been told that the money demand function in the United States has been unstable since the late 1970. To investigate this problem, you collect data on the real money supply (m=M/P; where M is M₁ and P is the GDP deflator), (real)gross domestic product (GDP)and the nominal interest rate (R). Next you consider estimating the demand for money using the following alternative functional forms:
(i)m = β₀ + β₁× GDP + β₂x R+ u
(ii)m = β₀ ×

G D P ^ { \beta 1 }

x

{ R } ^ { \beta 2 }

× e^u
(iii)m = β₀ ×

G D P ^ { \beta 1 }

x

1 + R ^ { \beta _ { 2 } }

× e^u
Give an interpretation for β₁ and β₂ in each case. How would you calculate the income elasticity in case (i)?

Quizplus · Accepted Answer

The Answer of You have been told that the money demand function in the United States has been unstable since the late 1970. To investigate this problem, you collect data on the real money supply (m=M/P; where M is M₁ and P is the GDP deflator), (real)gross domestic product (GDP)and the nominal interest rate (R). Next you consider estimating the demand for money using the following alternative functional forms: (i)m = β₀ + β₁× GDP + β₂x R+ u (ii)m = β₀ × $G D P ^ { \beta 1 }$ x $ { R } ^ { \beta 2 }$ × e^u (iii)m = β₀ × $G D P ^ { \beta 1 }$ x $1 + R ^ { \beta _ { 2 } }$ × e^u Give an interpretation for β₁ and β₂ in each case. How would you calculate the income elasticity in case (i)?

You Have Been Told That the Money Demand Function in the United