College of Business, Hospitality and Tourism Studies

School of Economics, Banking and Finance

ECN 702: Econometrics

Final Examination: Trimester 3, 2014

Question Paper
This examination constitutes 40% of total assessment of this unit and students must
score at least 40/100 in this examination in order to pass this unit.
Instructions
1. Time Allowed: 3 HOURS with additional 10 MINUTES reading time.
2. All answers are to be written in the Answer Booklet provided.
3. Write your ID Number on ALL pages of your Answer Booklet and any extra sheets
that you use.
4. This is a closed book examination. You are not permitted to access any books,
notes or other forms of written or electronic materials.
5. Attach the extra sheets securely at appropriate place before handing-in the
Answer Booklet to the supervisor.
Sections
Section A: Short Answers
Section B: Descriptive
Questions
Section C: Calculations and
Interpretations

Questions

Marks

10 Questions. All
compulsory.
6 Questions. Do any 5 only.

20

3 Questions. All
compulsory

Total

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50
30
100

Trimester 3, 2014

Section A: Short Answer Questions

[20 Marks]

There are 10 Questions in this Section and all questions are compulsory. Each is worth 2 marks.
1. What is econometrics and what is its importance in economics?
2. What is the difference between Time Series and Cross-sectional data?
3. What does coefficient of correlation show? Does the coefficient of correlation have any
capacity in showing which variable causes which?
4. How do you think the development of economic models is different from scientific findings in
a science lab?
5. How does the population regression function (PRF) differ from the sample regression function
(SRF)? Why do we develop a sample regression function?
6. What is goodness of fit? What variable is computed in econometrics that measures the
goodness of fit?
7. In econometrics, under the concept of estimation, what two types of estimation is carried out?
8. In econometrics, what is the difference between r2 and R2?
9. When would one conduct an auxiliary regression?
10. What is the difference between homoscedasticity and heteroscedasticity?
Section B: Descriptive Questions

[50 Marks]

There are 6 Questions in this Section. You are required to do any 5 only.
Question 1
Clearly outline and explain the 10 assumptions of the Gaussian Classical Linear Regression
Models.
(10 marks)
Question 2
The disturbance term ui is a surrogate for all those variables that are omitted from the model that
collectively affect Y. However, we do not introduce them into the model explicitly. The reasons are
many. Outline and explain at least 5 reasons we do not introduce them in the model explicitly.
(10 marks)
Question 3
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State in preceding order and explain at least 5 out of the 8 steps of the classical or traditional
methodology of econometrics.
(10 marks)
Question 4
There are at least 5 reasons for multicollinearity among the explanatory variables. State and
explain the 5 sources of multicollinearity.
(10 marks)
Question 5
There are several reasons why the error terms may be correlated in a series. State and explain at
least 5 reasons why the error terms would be correlated.
(10 marks)
Question 6
State whether the following equations are linear or not and why.

(10 marks)

a.
b.
c.
d.

Yi= 1+ 2X1+ 3X2+ 1X3+ui

Yi= 1+ 22X1+ 3X23+ 1X32+ui
Yi= 1+ 22X1+ 33X2+ 12X3+ui
Yi= 1+ 2X12+ 3X22+ 1X3+ui
1
1
e. lnYi= 1+ 2 X 12+ 3 2 X + 1X3+ui

Section C: Calculations and Interpretation

[30 Marks]

Question 1

[13 marks]

There are two parts, PART A and PART B, to this question and both are compulsory.
PART A
Salary was regressed on experience using computer software and the following information was
obtained. Use the following information and answer the questions that follow:
Ordinary Least Squares Estimation
****************************************************************************
Dependent Variable is Y
****************************************************************************
Regressor
Coeficient
Standard Error
T-Ratio [Prob]
f
0.54021
0.00972
43.6623
0.000
C
12.2134
0.9323
91.2245
0.000
****************************************************************************
R-squared
0.97986
R-Bar-Squared
0.9793

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Required:
a) Report the Equation in the standard way.

(2 marks)

b) Is the effect of experience on salaries significant? Why?

(2 marks)

c) What useful information will be conveyed by the estimated value of the parameters?
(2 mark)
d) What is the reason for presence of u?

(1 mark)

PART B
Suppose you are an economist at the Ministry of Labour and have been tasked with developing an
econometric model to see the factors that determine whether a person can get a suitable job in the
country or not. Use this information and answer the following questions:
a. What 4 variables will you consider in your model?

(2 marks)

b. What would be your prior expectation of the signs of each of the betas in your model?
(2 marks)
c. Identify at least two factors that would have a negative relationship with you dependent
variable in this model.
(2 marks)

Question 2: Hypothesis Testing

[6 Marks]

Assume that you did a two variable linear regression and found that 1 = 50.4 , 2 = 0.6056,
se (2) = 0.0257. Your sample size has been 10. Assuming = 5%, that is, 95% confidence
coefficient answer the following questions:
a. Construct a 95% confidence interval and interpret it.

(3 marks)

b. Conduct a hypothesis test to see the validity of the sample findings if the belief is that
the true 2 = 0.4
(3 marks)

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Question 3: Multiple Regression

[11 Marks]

Suppose you run a multiple regression where your dependent variable is child mortality (CMi) and
the three independent variables are per capita GNP (PGNPi ), Female literacy rate (FLRi ) and
weight at birth ((WABi ).
You get your Eveiws output as follows:

CMi = 263.6416, 0.0087 PGNPi , 2.3263 FLRi , 0.1028 WABi

se

R2 = 0.8069

= (12.3259)

(0.0023)

(0.3121)

(0.0021)

R2 = 0.7241

Required:
a. Interpret the results of the multiple regression output.

(6 marks)

b. When you run another multiple regression using the same data but this time removing
the variable WAB, you get the following output:
a. CMi = 263.6416, 0.0087 PGNPi , 2.3263 FLRi ,
b. se

= (12.3259)

c. R2 = 0.7054

(0.0023)

(0.3121)

R2 = 0.6803

Is there multicollinearity among the independent variables? Why, or why not?

(2marks)
c. If you keep on adding more and more independent variables to the regression, what do
you think will happen to the R2?
(1 marks)
d. If you were interested in including a qualitative variable to see whether such a variable
has any significant relationship with the Child mortality, which variable would you
consider? How would you go about including such a variable in this regression?
(2 marks)

THE END

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Formulas

Confidence interval
Pr [2 t /2 se (2) 2 2 + t/2 se (2)] = 1
= 2 t/2 se (2)

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