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BM/APR 2011/ECO546/545

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

ECONOMETRICS EC0546/545 APRIL 2011 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. 2. 3. This question paper consists of five (5) questions. Answer only four (4) questions in the Answer Booklet. Start each answer on a new page. Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) iii) the Question Paper an Answer Booklet - provided by the Faculty an eleven-page Statistical table - provided by the Faculty

4.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 8 printed pages
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QUESTION 1 a) What is the difference between error type I and error type II? (4 marks) b) Refer to the regression models below:

Model 1: Model 2:
i)

Q= a + J3 X + <j)X2 + /u Q = a XfX*eM

Are the above models linear regression models? Why or why not? (3 marks)

ii)

If OLS technique is applied, would the interpretation of /? for both models be the same? Justify your answer. (3 marks)

c)

With a model of two independent variables, explain the differences between a simple regression model and a mathematical model? (4 marks) The data on gross capital formation (I) and sales (S) for 10 firms are given in the table below: Dependent Variable Firm 1 2 3 4 5 6 7 8 9 10 Gross Capital Formation (I) 30.5 31.5 31.2 39.1 31.2 42.1 45.9 46.8 37.8 31.5 Independent Variable Sales (S) 135 150 145 250 140 280 330 345 245 150

d)

Compute the estimated coefficients. (9 marks) Based on your answer in (i), draw the estimated regression line. (2 marks)
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BM/APR 2011/ECO546/545

QUESTION 2 a) Discuss two (2) BLUE properties of an estimator. (3 marks) b) Consider the following estimation results for Private Saving in OECD countries for the period of 1980-2009. Figures in the parentheses are standard errors.

S = - 230.4588 (100.09) R2 =0.8154

where: S Y R INF -

+ 0.6013 Y + 0.0257R + 0.1572 INF (0.2114) (0.1175) (0.1869)

aggregate private saving real per-capita Gross Domestic Product real interest rate real inflation rate

i)

Is the observed relationship between S and Y justifiable a priori? Explain. (2 marks)

ii)

Test whether all the slope coefficients are not individually significantly different from zero at 5% level of significance. Show the procedures involved. (10.5 marks)

iii)

Is the R considered as high? Why? (1.5 marks)

iv)

Why the estimated intercept is negative? (2 marks) Test the significance of the estimated R2 at 5% level of significance. (6 marks)

v)

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QUESTION 3 The following regression results were obtained from the data for Malaysian firms in 2009.

Profit (TV) CONSTANT 2.8773 (0.085) Cash flow 0.0321 (0.049) Sales Z
2

0.0847 (0.0125) 0.8626 (0.009)

0.5094

Note: p-value in the parentheses where: f Z = size of a firm = 0 : small firm n, Cash flow and Sales are in million ringgit. 1 : large firm

a)

For each independent variable, determine whether it is a quantitative or qualitative variable. (3 marks) Why a dummy variable is included in the above table? (2 marks)

b)

c)

Refer to the above table, interpret variable Sales. (2 marks)

d)

Derive the regression equation for small firms and large firms. (3 marks)

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e)

Based on your answer in (d), draw the regression equations in one diagram if Sales = RM10 million. (4 marks) Test the significance for variable Z at 5% level of significance. (3 marks)

f)

g)

Should we drop variable Z from the specification? Give one (1) reason. (2 marks)

h)

Given the average values of cash flow and sales are RM15 million and RM24 million respectively, find the expected value of profit for both types of firms. (4 marks) What would happen if two dummy variables that represent the size of a firm is introduced in a regression equation? Justify your answer. (2 marks)

i)

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QUESTION 4 Consider the estimated models below: Model 1: Ln C = 0.6477+ (0.0417) 0.8804 LnGDP(0.9899) 0.0047LnIR (0.0007)

R2 = 0.8499 DW = 0.7015 Model 2: Ln C = ft 3993 + 0.8484 Ln GDP - ft 1482 Ln IR + 0.6142 Ln W (0.0304) (0.8769) (0.0401) (0.7099) R2 = 0.8516 DW= 1.7551 Model 3: C = 0.5445+ (0.0012) R2 = 0.8006 DW=1.9978 where C GDP IR W aggregate consumption (in RM million) Gross Domestic Product (in RM million) Interest Rate in percent Wealth (in RM million) 0.7987 GDP- 0.01826 IR (0.0101) (0.0033)

Figures in the parentheses are p-values. No of observations is 35.

a)

Determine the functional form for Model (1) and Model (3). (2 marks)

b)

For Model (2) and (3): i) interpret the coefficient of variable GDP. (3 marks) ii) what is the expected sign of the coefficient of variable GDP? Why? (2 marks)

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c)

Given the values of GDP and IR are RM97 million and 8%, find the predicted value of aggregate consumption for Model (3). (2 marks) Construct the 95% confidence interval for the slope coefficient of variable GDP in Model (3). (Given, the standard error of the estimated coefficient is 0.2141). (4 marks)

d)

e)

Based on your answer in (d), test whether the variable is significant at 5% using confidence interval approach. (3 marks) Can the R-sq be compared between: i) ii) iii) Model (1) and Model (2)? (1.5 marks) Model (2) and Model (3)? (1.5 marks) Model (1) and (3)? (1.5 marks) (Note: Provide the appropriate reason for each)

f)

g)

Test the existence of serial correlation for model (3) at 5% level of significance. (4.5 marks)

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QUESTION 5 a) State three (3) problems when the stochastic error terms are not independent. (3 marks) b) i) Explain what is multicollinearity? (5 marks) ii) Give three (3) approaches to overcome multicollinearity. (3 marks) c) The estimation results are given as follows: 2 Dependent Variable: e Included observations: 406 Variable Constant

x,
*2

Coefficient 2351.157 -305.113 12.882 -0.879 -0.542 -6.641 0.0855

p -value 0.000 0.000 0.000 0.087 0.024 0.047

x] x]
XjX2 R2 Answer the following questions. i)

Conduct an appropriate test to detect if there is a problem in estimation at 5% level of significance. (8 marks) What are the consequences if the above problem in (i) is ignored? State three (3)consequences. (3 marks) Describe one (1) method to overcome the above problem. (3 marks)

ii)

iii)

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