Assume That a Simple Economy Could Be Described by the Following

question 50

Essay

Assume that a simple economy could be described by the following system of equations,
C_t = β₀ + β₁Y_t + u_i
I_t = $\bar I$ _,
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?

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Definitions:

Economic Behavior

The actions taken by individuals, businesses, and governments in producing, distributing, and consuming goods and services, often studied to predict patterns.

Government Intervention

Actions taken by a government to affect the economy, which can include regulations, subsidies, tariffs, and direct state involvement in certain industries.

Private Sector

The part of the economy that is run by individuals and companies for profit, as opposed to being controlled by the government.

Laffer Curve

A theoretical representation of the relationship between tax rates and tax revenue, suggesting that lower tax rates can lead to higher revenues under certain conditions.