Your Textbook Uses the Following Example of Simultaneous Causality Bias

question 21

Essay

Your textbook uses the following example of simultaneous causality bias of a two
equation system: $$\begin{array} { c } Y _ { i } = \beta _ { 0 } + \beta _ { 1 } X _ { i } + u _ { i } \\\\X _ { i } = \gamma _ { 0 } + \gamma _ { 1 } Y _ { i } + v _ { i }\end{array}$$ To be more specific, think of the first equation as a demand equation for a certain good, where $Y$ is the quantity demanded and $X$ is the price. The second equation then represents the supply equation, with a third equation establishing that demand equals supply. Sketch the market outcome over a few periods and explain why it is impossible to identify the demand and supply curves in such a situation. Next assume that an additional variable enters the demand equation: income. In a new graph, draw the initial position of the demand and supply curves and label them $D ^ { 0 }$ and $S ^ { 0 }$ . Now allow for income to take on four different values and sketch what happens to the two curves. Is there a pattern that you see which suggests that you might be able to identify one of the two equations with real-life data?

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Definitions:

Finally Block

A block in Java exception handling that executes code after a try/catch block, regardless of whether an exception was caught.

Try Block

A code structure used in exception handling that encloses code that might throw an exception.

Exception

An event in programming that disrupts the normal flow of instructions, usually indicating an error or other unexpected condition.

Event-Driven Programming

A programming paradigm in which the flow of the program is determined by events such as user actions (button clicks, key presses), sensor outputs, or message passing.