Q5 b) i

Let : Cars = Y t
Cars = β 0 + β 1unemployment + β 2 Export + ε 1
Unemployment = W t
Export = α 0 + α 1 Cars + α 2 GDP + α 3 Investment + ε 2
Export = C t

GDP = Zt
Y t = β0 + β1W t + β2 C t + ε 1 1
Investment = F t
C t = α 0 + α 1 Y t + α 2 Zt + α 3 F t + ε 2 2

Endo : Y t , C t

Exo : W t , Zt , F t

Pre : W t , Zt , F t

Substitute 2 into 1

Y t = β 0 + β 1 W t + β 2 ( α 0 + α 1 Y t + α 2 Zt + α 3 F t + ε 2 ) + ε 1

Y t = β 0 + β 1 W t + β 2 α 0 + β 2 α 1 Y t + β 2 α 2 Zt + β 2 α 3 F t + β 2 ε 2 + ε 1

Y t - β 2 α 1 Y t = β 0 + β 2 α 0 + β 1 W t + β 2 α 2 Zt + β 2 α 3 F t + β 2 ε 2 + ε 1

( 1 - β 2 α 1 ) Y t = β 0 + β 2 α 0 + β 1 W t + β 2 α 2 Zt + β 2 α 3 F t + β 2 ε 2 + ε 1

β0 + β 2 α 0 β1 β 2 α2 β 2 α3 β 2 ε 2+ ε 1
Yt = + Wt + Zt + Ft +
1−β 2 α 1 1−β 2 α 1 1−β 2 α 1 1−β 2 α 1 1−β 2 α 1

Y t = π 0 + π 1 W t + π 2 Zt + π 3 F t + U t 3

Where;

β0 + β 2 α 0 β1 β 2 α2
π0 = π1 = π2 =
1−β 2 α 1 1−β 2 α 1 1−β 2 α 1

β 2 α3 β 2 ε 2+ ε 1
π3 = Ut =
1−β 2 α 1 1−β 2 α 1

Substitute 3 into 2;
C t = α 0 + α 1( π 0 + π 1 W t + π 2 Zt + π 3 F t + U t ) + α 2 Zt + α 3 F t + ε 2

C t = α 0 + α 1 π 0 + α 1 π 1 W t + α 1 π 2 Zt + α 1 π 3 F t + α 1 U t + α 2 Zt + α 3 F t + ε 2

C t = α 0 + α 1 π 0 + α 1 π 1 W t + ¿ ¿ + α 2 ¿ Zt + ¿ ¿ + α 3 ¿ F t + α 1 U t + ε 2

C t = π4 + π5W t + π6 Zt + π7 Ft + M t
Where;

π4 = α 0 + α 1 π0 π5 = α 1 π1

β 0 + β 2 α0 β1
= α0 + α1 [ 1−β 2 α 1 ] = α1 [ 1−β2 α 1 ]
α 0 (1−β 2 α 1)+α 1 β 0 +α 1 β 2 α 0 α1 β 1
=
1−β 2 α 1
= 1−β α
2 1

α 0 −α 0 β 2 α 1 +α 1 β 0 +α 1 β 2 α 0
= 1− β2 α 1

α0 + α1 β 0
= 1−β α
2 1

π6 = α 1 π2 + α 2 π7 = α 1 π3 + α 3

β2 α 2 β2 α 3
= α1 [ 1−β2 α 1
+ α2 ] =α 1 [ 1−β2 α 1
+ α3]
α 1 β 2 α 2+ α 2 (1−β2 α 1) α 1 β 2 α 3+ α 3 (1−β 2 α 1)
= 1− β2 α 1
= 1−β2 α 1

α 1 β 2 α 2+ α 2−α 2 β 2 α 1 α 1 β 2 α 3+ α 3 −α 3 β 2 α 1
= 1−β 2 α 1
= 1−β 2 α 1

α2 α3
= 1−β α = 1−β α
2 1 2 1

M t = α 1Ut + ε 2

β 2 ε 2 +ε 1
= α1 [ 1−β2 α 1 ]
+ ε2

α 1 β 2 ε 2+ α 1 ε 1 +ε 2 (1−β 2 α 1)
=
1−β 2 α 1

α 1 β 2 ε 2+ α 1 ε 1 +ε 2 −ε 2 β2 α 1
=
1−β 2 α 1
 α1 ε1 + ε2
=
1−β 2 α 1