Assume That a Simple Economy Could Be Described by the Following

question 59

Essay

Assume that a simple economy could be described by the following system of equations,
Ct = β0 + β1Yt + ui
It = ,
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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