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Final, Page 1 of 6
December 2014
Answer as many questions as you can. All questions will count towards your
score. Calculators are allowed as long as they cannot be used to
communicate with other students. This final is open book, but interaction
with other students is not allowed. There are 23 full questions. Show your
work in sections 2 and 3 including output and graphs to get credit. Just
write the letter corresponding to your answer for the multiple choice
questions. Copy your output from SAS into the Word editor for Section 2
and 3. You have to print your answers, and distribute the print in the
envelopes (white and red). Spend equal time on all three sections.
Multiple Choice
Final, Page 2 of 6
December 2014
C. 1 1.96se 1 , 1 + 1.96se 1
D. all the previous answers are wrong
6. Consider the AR(1) model: yt = 0.3 + 0.7yt1 + t where var(t ) = 2 . The variance
of the model is
A. 2
B. 0.512
C. 2 /0.51
D. 2 /0.1
E. All previous answers are wrong
2
7. In the multiple regression model, the adjusted R2 , R
A. can be negative
B. will always be higher than the regression R2
C. equals the average of the estimated errors
D. cannot decrease when an additional explanatory variable is added.
8. Consider the AR(1) model: yt = 0.3+0.7yt1 +t where var(t ) = 2 . The covariance
between yt and yt1 of the model is
A. 1.372
B. 0.72
C. 1.37
D.
E. All previous answers are wrong
9. Consider the following variables. M ale is a binary variable which is equal to 1 if the
individual is male, and is 0 otherwise. F emale = 1 if the the individual is a female,
and is zero otherwise. City is a binary variable which is equal to 1 if the individual
is living in a city. Finally, Countryside is equal to (1 City). If you regress income,
Income, on a subset of the variables mentioned above, you will always have a case
of perfect multicollinearity if you consider:
d i = 0 + 1 F emalei + 2 Cityi
A. Income
d i = 0 + 1 M alei + 2 Countrysidei
B. Income
d i = 1 Cityi + 2 Countrysidei
C. Income
D. all the previous answers are wrong
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Final, Page 3 of 6
December 2014
10. Consider the MA(2) model: yt = 0.4 + ut + 0.2ut1 0.24ut2 . The model
A. is non-stationary
B. has a deterministic trend
C. is stationary
D. is not invertible
11. If you have a regression model, Yi = 0 + 1 X1,i + 2 X2,i + ui and Cov(X1 , X2 ) > 0,
then omitting X1 from an OLS regression
A. will always give an upward bias of the estimates of 2
P
B. could make N
i=1 ui < 0
C. will always bias the estimation of 2
D. all the previous answers are wrong
12. Consider the MA(2) model: yt = 0.4 + ut + 0.2ut1 0.24ut2 . The mean of the
model is
A. 0.4
B. 0.4
C. 0.84
D. 0.2
E. All previous answers are wrong
13. Assume that the estimation of a quadratic regression model leads to wage
d = 10 +
2
3.84 Education 0.42 Education and the coefficients estimated are significantly
different from 0. If Education increased from 10 years to 11, then the predicted effect
of this change on wage is
A. 3
B. 3.8077
C. 10+3.85
D. All previous answers are wrong
14. Consider the MA(2) model: yt = 0.4 + ut + 0.2ut1 0.24ut2 where the variance of
ut is u2 . The correlation between yt and yt1
A. 0.84
B. 0.152
C. 1.0976u2
D. 0.2u2
E. All previous answers are wrong
15. In case of the simple regression model Yi = 0 + 1 Xi + ui , i = 1, . . . , n, when
Corr(X, u) < 0, then
A. X is exogenous
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Final, Page 4 of 6
December 2014
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Final, Page 5 of 6
December 2014
Cross-Sectional Analysis
The Microsoft Excel dataset proximity.xls contains data from a study on 2,060 American young male individuals during the year 1976. The following table displays the
label for each variable:
id
prox2
prox4
educ
age
smsa
south
wage
married
exper
individuals identifier
equals 1 if the individual lived near a 2 year college in 1966 and 0 otherwise
equals 1 if the individual lived near a 4 year college in 1966 and 0 otherwise
education of individual measured in years in 1976
age of individual measured in years in 1976
equals 1 if the individual lives in a urban area in 1976, and 0 otherwise
equals 1 if the individual lives in the South in 1976, and 0 otherwise
hourly wage in US Dollars cents in 1976
equals 1 if the individual is married in 1976, and 0 otherwise
years of work experience in 1976
1. Consider the previous regression (i.e. wage on exper) and then regress ln (wage)
on ln (exper). Interpret the results of your regressions. Also comment on the
R2 . Are there any drawbacks in considering the regression with logarithms?
Explain why.
2. Now consider lwage = ln (wage) as the dependent variable . Run an OLS
regression considering a subset of the variables available. Motivate your choice
of explanatory variables using economic intuition (maximum of three sentences).
3. Do you think that there is imperfect multicollinearity in a regression which
considers ln (age) and ln (exper)? Explain why.
4. Use now a 2SLS to estimate lwage by instrumental variables. Motivate the
choice of the instruments using a maximum of three sentences.
5. If your dataset had contained the individuals type of education and their own
parents education (which are NOT in the dataset), would it be useful? Explain
why using a maximum of three sentences.
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Final, Page 6 of 6
December 2014
23. You have a dataset, AgricIndus.xls, that contains log real Chinese national income
in the agricultural sector and the industrial sector.
(a) Conduct a unit root test on the log of agricultural income using a trend and 4
lags. The value of the test statistic is
A. -2.12 and is not significant at the 15 percent level. So, we fail to reject
the null of a unit root at the 15 percent level.
B. -2.12 and is significant at the 15 percent level. So, we reject the null
of a unit root at the 15 percent level.
C. 1.21 and is not significant at the 15 percent level. So, we fail to reject
the null of a unit root at the 15 percent level.
D. 1.21 and is significant at the 15 percent level. So, we reject the null of
a unit root at the 15 percent level.
E. All previous answers are wrong.
(b) Conduct a unit root test for the log of the industrial income using four lags and
a trend. The value of the test statistic is
A. -0.15 and is not significant at the 15 percent level. So, we fail to reject
the null of a unit root at the 15 percent level.
B. -0.15 and is significant at the 15 percent level. So, we reject the null
of a unit root at the 15 percent level.
C. -2.85 and is not significant at the 15 percent level. So, we fail to reject
the null of a unit root at the 15 percent level.
D. -2.85 and is significant at the 15 percent level. So, we reject the null
of a unit root at the 15 percent level.
E. All previous answers are wrong.
(c) Suppose that you had the following non-stationary model: Yt = a etut ; where
ut is a white noise process. How would you remove the deterministic trend?
(d) Get both agriculture and industry in percentage change (first difference multiplied by 100). Does the percentage change in industry granger cause the percentage change in agriculture? Use two lags in each variable and white standard
errors. Report the relevant test statistics.
(e) Regress the percentage change in industry on one lag of the percentage change in
agriculture. What is the coefficient? Is the coefficient significant using NeweyWest standard errors? What is the p-value?
(f) Build an ARIMA model for industry.
(g) Build an ARIMA model for agriculture.
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