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Netusil

Fall 2004 Final Examination: AK

your answers thoroughly. (30 points total)

dollars) and education (measured by years of schooling). Interpret this result. (5

points)

The correlation coefficient tells us the degree of a linear relationship between variables. It is

related to R2 (goodness of fit measurement). The sign of the correlation coefficient tells us the

sign of the slope of the line. The closer the correlation coefficient is to +1 or –1 the stronger the

linear relationship between the two variables. The unit of measurement does not matter.

determine the statistical significance of one or more regression coefficients.”

Explain. (5 points)

Multicollinearity occurs when there is linear dependence among the regressors. This may result

from a high correlation (simple bivariate), but may also be a result of a more complicated

relationship between regressors.

When multicollinearity occurs the estimated standard errors are large which may result in a

failure to reject the null hypothesis when the null hypothesis isn’t true. This increases the

probability of making a type II error.

in years) yields the following results. (5 points)

se = (0.8355) (.981 )

significant?

average, to increase the average wage by $.64. The t-critical value is based on 11 degrees of

freedom which, for a significance level of .10 (two-tailed test), yields a t-critical value of 1.796.

Since t* < t-critical we are unable to reject the null hypothesis. The estimated coefficient is not

statistically significant.

c. Is the coefficient on education statistically different from 1? Include the five steps

outlined by Mirer for conducting a hypothesis test.

2. Level of significance is established by convention = 5%

3. Construct the decision rule: There are 11 degrees of freedom, The t-critical value for a two-tailed test

with alpha = .05 is 2.201. Reject Ho if t* > 2.201

4. Estimate t*: (.6416 – 1)/.981 = -0.365.

5. State and interpret. Since t* < t-critical we cannot reject the null hypothesis that the estimated

coefficient is equal to 1.

4.TFU: The variance of the t distribution will always exceed the variance of the standard

normal distribution. Explain. (5 points)

As degrees of freedom increase, the t-distribution approaches the normal distribution. This can

be seen by comparing Tables A.1, A.2, and A.3. The probability that Z > 1.96 is .025 (which

doubled equals .05). The t-critical value that correspond to df = infinite and a significance level

of .05 is 1.96. So, in general, the variance of the t-distribution (the spread) will exceed the

variance of the normal distribution unless the degrees of freedom are very large.

the estimated coefficient is statistically significant. Explain the basis for this rule-

of-thumb and the conditions under which is it is appropriate. (5 points).

This rule-of-thumb is based on the relationship between the area under a distribution function

and the number of standard errors a t* value is from the hypothesized value. We know that

approximately 95% of a distribution is within +/- two standard deviations of the expected value.

With sufficient degrees of freedom the rule-of-thumb of t* = 2 approximates a 5% significance

level (see Table A.2, df > 50).

6. In a recent study the Census Bureau reported that individuals without high

school degrees earned, on average, $18,900 a year in the late 1990s. People with

high school degrees earned an average of $25,000, college degree holders earned

an average of $45,400 while professional degree holders earned an average of

$99,300. Converting these annual figures to lifetime earnings, the Census Bureau

calculated that college graduates earned between $1.2 million to $2.1 million

more than high school graduates while professionals earned $4.4 million more

than high school graduates. Newspapers responded to this report by concluding

that the country would be better off with more education, for example, a Seattle

2

Post-Intelligencer story about this report was titled, “New government data

support what your parents told you all along about staying in school: A good

education does pay off.” Using the tools and theories covered in this course

explain why you agree or disagree with this conclusion. (5 points)

This newspaper studies are inferring causality based on a simple correlation. While education

can improve productivity (and earnings), there are other factors that are correlated with

education such as your parents’ education level.

Part II: Problems and questions requiring a longer answer. (25 points)

7. Ray Fair reports the following regression results in his 2000 Update on the effect

of economic events on votes for President:

(t-statistics in parentheses)

Sample: 1916-2000 1916-1996 1916-1960

(6.72) (7.45) (7.94)

(-2.71) (-2.77) (-1.34)

(3.12) (3.86) (2.90)

(2.50) (3.25) (4.26)

(-3.04) (-3.07) (-2.34)

PARTY -2.71 -2.84 -3.58

(-4.65) (-5.21) (-6.23)

(1.46) (1.96) (1.72)

(18.08) (19.10) (21.88)

2

R 0.923 0.941 0.987

No. obs. 22 21 12

3

4

where :

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

• GOODNEWS = number of quarters in the first 15 quarters of the administration in which the growth

rate of real per capita GDP is greater than 3.2 percent at an annual rate except for 1920, 1944, and

1948, where the values are zero.

Assume it is 2012 and that you are working as a White House analyst. Jed Bartlett, the

incumbent Democrat, is running for reelection. 1 His campaign team wants you to use Ray

Fair’s research to predict his vote share.

a. Which of the three reported regressions would you use in your analysis? Provide a detailed

explanation. (10 points)

Should reflect on Fair’s paper. The number of observations for the third regression are troubling

although it does have the highest R2 of all the models. Debate between best fit and best predictive ability

(presumably we’d want the model that was the best predictor under these circumstances). I’d probably

use the second regression because it excludes the 2000 election (where Nadar was a confounding factor).

b. Using the regression selected in part (a) to estimate Jed Bartlett’s vote share for the

following scenario: (10 points)

• The Democrats have been in power for 1 term

• The growth rate of real per capita GDP was 3 percent

1Jed Bartlett is the President on the TV program West Wing. He is a Democrat, has a PhD in economics

and received a Nobel Prize.

21

• Inflation was 1.2%

• There have been 3 quarters of good news

Ray Fair’s models were a bit unstable. He presented a range of predictions using different models. The

difficulties that he discussed in the Clinton/Bush/Perot election year also occurred in the

Gore/Bush/Nadar election year, so the treatment of Nadar is important. In his article he didn’t have a

problem with autocorrelation and I didn’t see evidence of this in class, but it is time-series data and

should be tested for autocorrelation.

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