CONFIDENTIAL, BM/JUN 2016/ECO545/546 SS) UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE : ECONOMETRICS COURSE CODE ECO545/546 EXAMINATION : JUNE 2016 TIME 3 HOURS INSTRUCTIONS TO CANDIDATES, 1. This question paper consists of four (4) questions. 2. Answer ALL questions in the Answer Booklet. Start each answer on a new page. 3. Do not bring any material into the examination room unless permission is given by the invigitator. 4, Please check to make sure that this examination pack consists of {) the Question Paper. ji) an Answer Booklet ~ provided by the Faculty. i) a nine-page Statistical table— provided by the Faculty, 5. Answer ALL questions in English DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 7 printed pages (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 2 BMIJUN 2016/ECO545i546 QUESTION 14 a) _ Explain the goodness of fit when RSS=0. (2 marks) b) In Ordinary Least Squares method of estimation: i) explain why do we take vertical deviations instead of horizontal deviations? (2 marks) ii) is it possible to estimate the following model? Justify why? Y, =O, +0; X,+0,Z; + u, (2 marks) °) Assuming the relationship between two variables is described by the following ‘equation. ¥, = 2.354 + 0,902 X, where D5? = 5211.6934 Div? = 5507.8526 Compute the coefficient of determination and describe the explanatory power of the above estimated regression equation (4 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL,CONFIDENTIAL 3 BM/JUN 2016/ECO545/546 4) The following table contains data on the gross disposable income (GDI) and aggregate consumption expenditure (ACE) for a particular country for the year 2003-2014. Year bl ACE (billions of Ringgit) | (billions of Ringgit) 2003 114 102 2004 118 106 2005 126 108 2006 130 110 2007 136 122 2008 140 | 124 2009 148 128 2010 156 130 2011 160 142 2012 164 148 2013 170 150 2014 178 154 i) Using OLS, regress aggregate consumption expenditure (ACE) on gross disposable income (GDI) and obtain the estimated parameters. (10 marks) ii) Write the estimated equation. (1 mark) iii) Explain the economic meaning of the estimated intercept. (2 marks) iv) __ Interpret the regression slope coefficient. (2 marks) © Hak Cipta Universiti Teknolog! MARA CONFIDENTIAL,CONFIDENTIAL 4 BMIJUN 2016/ECO545/546 QUESTION 2 a) A model of the diabetes related mortality data yields the following results: [mDM; = 0.9864 — 0.0826InGLR; + 0.1854InPCCE; se =(0.0070) (0.0026) (0.0122) R? = 0.5688 where: DM = Mortality due to diabetes, the number of deaths in a year per 100,000 population GLR_ = General population literacy rate (%) er capita consumption expenditure in 2000 (USD, thousands) i) Determine the functional form of the above model. Justify your answer. (2marks) ii) How can we obtain the consumption (PCCE) elasticity in this model? Interpret, the elasticity that you obtained, (2 marks) b) A different model of the diabetes related mortality was obtained by the World Health Organization using cross-sectional data from a sample of 153 countries. DM; = 2,263.6416 — 72.2316GLR, + 155.0056PCCE, se= (15,9822) (2.3085) (10.2099) R? = 0.7077 where: DM = Mortality due to diabetes, the number of deaths in a year per 100,000 population GLR_ = General population literacy rate (%) PCCE = per capita consumption expenditure in 2000 (USD, thousands) From economic theory, GLR is expected to have a negative impact on DM while a priori impact of PCCE is unclear. i) Justify why the above estimated equation is considered as linear. (1 mark) ii) From the regression results presented, calculate and explain the consumption (PCCE) elasticity by using the respective mean values of DM = 2,580 and PCCE = 2.15. (3 marks) © Hak Cipta Universiti Teknologi MARA, CONFIDENTIAL,CONFIDENTIAL 5 BMIJUN 2016/ECO545/546 iii) Based on the theory, determine whether GLR is statistically significant at the 5% level using the t-test approach. (4.marks) iv) Perform the overall statistical testing at 5% level of significance. (6 marks) v) Assuming that the sign for the estimated coefficient of variable GLR is Positive, would the decision in (ii) remain the same and justify your answer. Establish a 90 percent confidence interval and test the significance of variable PCCE. (7 marks) QUESTION 3 a) Why should we use a categorical variable as one of the explanatory variables in a regression analysis? (2 marks) b) The results below are the outcome from a regression model on the quantity of cars produced by a firm annually over a 14-year period. G, = 229.741 + 362.861; — 209.623Dy_ — 287.142(DrePr) se = (2165) (35.995) (54.607) _(57.659) R? = 0.881 where: Q: = Quantity of cars (in thousands of units) P= Average price of cars (in thousands of Malaysian Ringgit) Dy, = 1 for years with industrial strike; 0 if otherwise i) Find the quantity of cars produced by the firm when E(Q¢|Dse = 0,P: = 55.3) and E(Qr|D3, = 1, Pp = 64.5). (3 marks) ii) What are the two (2) advantages of estimating the model above as compared to estimating two separate regressions for each case? (3 marks) iii) Construct two (2) separate car production equations from the above model. (4 marks) iv) Based on your answer in (ii), what can you conclude? (1 mark) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL,CONFIDENTIAL 6 BM/JUN 2016/ECO545/546 v) Based on your answer in (ii), draw the regression lines for the separate equations in one diagram. (4 marks) ©) Consider the following theoretical regression model: Y= Oy + Dai + @Dai + BrXri + Bo(DaiXay) + where’ for female and equal to 0 if otherwise D,;=1 for male and equal to 0 if otherwise X,;=the amount of years in working experience for the th observation i) Determine the type of regression model stated above. Why? (2 marks) ii) What is the main difference between the coefficients; a, and f,? Explain. (2 marks) What would happen if we were to run a regression based on the above specification? Justify your answer. (4 marks) QUESTION 4 2) _ Explain why multticollinearity is not a problem in a two-variable regression model. (2 marks) b) You have estimated the following wage-experience model: Wage; = 5.373 + 0.031Exp, se = (0.257) (0.012) R?=0.013 N=526 RSS=7,069.139 DWd=1808 i) Write down the auxiliary equation with three fitted terms for the Ramsey RESET test and state the hypotheses. (4 marks) ii) From (i), suppose that you obtained the following statistics: R? = 0.095 and RSS = 6,483,275. Find the test statistic, critcal value at 5% and explain your conclusion. (5 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 7 BM/JUN 2016/ECO545/546 °) a) ii Describe the main disadvantage of the RESET test and suggest one (1) alternative method to test specification bias. (3 marks) The following auxiliary regression was also estimated from the wage-experience model: In(e?) = 0.723 + 0.176 InExy, 0.219) (0.083) R?=0.008 N=526 Carry out the test at 5% level of significance and discuss the outcome. (6 marks) Describe the test that is related to the regression above. What is it supposed to detect? (2 marks) Briefly explain two (2) consequences of pure serial correlation. (3 marks) END OF QUESTION PAPER (© Hak Cipta Universit Teknologi MARA CONFIDENTIAL,