G. Menges developed the following econometric model for the West German economy*:
Yt = β0 + β1 Yt-1 + β2 It + u1t It = β3 + β4 Yt + β5 Qt + u2t
Ct = β6 + β7 Yt + β8 Ct-1 + β9 Pt + u3t Qt = β10 + β11 Qt-1 + β12 Rt + u4t
where Y = national income
I = net capital formation C = personal consumption Q = pro?ts
P = cost of living index
R = industrial productivity
t = time
u = stochastic disturbances
a. Which of the variables would you regard as endogenous and which as exogenous?
b. Is there any equation in the system that can be estimated by the single-equation least-squares method?
c. What is the reason behind including the variable P in the consump- tion function?