IGNOU BECE 142 2025 2026 - Consider the following Keynesian model of income determination

Question

Consider the following Keynesian model of income determination

$\begin{align}C_t&=\beta_{10}+\beta_{11}Y_t+U_{1t}\\I_t&=\beta_{20}+\beta_{21}t+\beta_{22}Y_{t-1}+U_{2t}\\Y_t&=C_t+I_t+G_t\end{align}$

Where,

C= Consumption expenditure

I=Investment expenditure

Y=Income

G=Government expenditure

G₁ and Yt-1 are assumed predetermined

(a) State the reduced form equations and determine which of the preceding equations are identified.

(b) Which method will you use to estimate the parameters of the over identified equation and of the exactly identified equation? Justify your answer.

10 Jan 2026

Answer :

Word Count : 424

In the given Keynesian model, the structural form of income determination can be expressed as: C = C₀ + C₁Yₜ₋₁ I = I₀ + I₁Y Y = C + I + G Here, C represents consumption expenditure, I is investment expenditure, Y is national income, G is government expenditure, and G₁ and Yₜ₋₁ are assumed predetermined variables. To derive the reduced form equations, we express each endogenous variable solely in terms of predetermined variables and exogenous factors. Substituting C and I into the income equation, we have: Y = (C₀ + C₁Yₜ₋₁) + (I₀ + I₁Y) + G Simplifying, we get: Y - I₁Y = C₀ + I₀ + G + C₁Yₜ₋₁ Y(1 - I₁) = C₀ + I₀ + G + C₁Yₜ₋₁ Y = (C₀ + I₀ + G + C₁Yₜ₋₁) / (1 - I₁) Similarly, consumption in reduced form becomes: C = C₀ + C₁Yₜ₋₁ Investment in reduced form is: I = I₀ + I₁Y

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