Economics Statistics

1 Using the data provided for the four equation macro model we have been using, examine the consumption function: CO = β1+ β2 YD + β3 CO(-1) + ε

SHOWING ALL WORK NEATLY AND IN AN ORDERLY READABLE WAY (indicating the relevant test):

Estimate the above equation using all the data with OLS

Examine for normality of the error term

Examine for multicollinearity

Examine for heteroscedasticity

Examine for serial correlation

Examine for the violation of the Full Ideal Conditions using the Ramsey (RESET) Test

2 Re-estimate the above consumption function with Two Stage Least Squares using all the possible instruments (including a constant). Note: there are five exogenous variables – not counting the constant term.

3 Consider the Demand and Supply model below where QD is the quantity demanded and QS is the quantity supplied; P is price:

QD = β1 + β2 P + ε and

QS = α1 + α2 P + µ

ε and µ are the error terms.