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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