SINGAPORE MANAGEMENT UNIVERSITY

School of Economics

Econ107 Introduction to Econometrics

Sample Questions
(Time allowed: 2 hours)
1 Consider the 2 variable regression model

Yi 0 1 X i i (1)
2
Denote 1 to be the OLS estimator of 1 and se( 1 ) to be .
x
2
i

For each of the following statements indicate whether it is justified and explain
your reasons.

(a) Multicollinearity raises the standard error of 1 and hence the t-test based on
and se( ) is invalid.
1 1 (6 marks)

(b) Heteroskedasticity leads to an unbiased estimator of 1 and hence the t-test

based on 1 and se( 1 ) is valid. (6 marks)

(c) Serial correlation leads to an unbiased estimator of 1 but the t-test based on
is always invalid.
1 (6 marks)

(d) Misspecification of the functional form leads to an unbiased estimator of

1 but the t-test based on 1 and se( 1 ) is invalid. (6 marks)

(e) If Yi is a dummy variable, the linear probability model allows for an

unrestricted range of probability, hence the t-test based on 1 is always
invalid. (6 marks)

2. Suppose you are given the following results for a time series of 23 annual
Australian aggregate economic data (standard errors in parentheses):

C t 8.133 0.95wt 0.452 pt 0.121a4

(8.91) (0.95) (0.66) (1.09) (1)
R 2 0.95
 where Ct = annual Australian domestic consumption (in billions of A$);
wt = annual Australian wage income (in billions of A$);
pt = annual Australian nowage-nofarm income (in billions of A$);
at = annual Australian farm income (in billions of A$).

(a) How would you interpret the coefficients of wt , pt , at ? (6 marks)

(b) Test the null hypotheses that the coefficients of wt , pt , at are individually
indifferent from zero respectively at a 5% significance level using a one-
sided test. (6 marks)

(c) Interpret R 2 . Specify the hypothesis to test the overall significance of the
regression model. Use the value of R 2 to test this hypothesis. (7 marks)

(d) What can you conclude from (b) and (c)? In this case, what are the
properties of the OLS estimator? Do you need to be concerned with the
problem from the perspective of hypothesis testing? Why or why not? (7 marks)

(e) Explain how to use an auxiliary regression to detect the problem you
identified in (d). Suggest a way to solve the problem. (7 marks)

(f) If we now measure the dependent variable and all the independent
variables by millions of A$ instead of by billions of A$, without
re-estimating the model, what are the new estimated coefficients? (7 marks)

The following results are obtained based on the same data:

C t 8.94 0.61 pt
(1.67) (0.20) ..(2)
R 2 0.8

(g) Which model, (1) or (2), do you prefer? Give your reasoning. (6 marks)

3. Consider the following model:

Yi 0 1 X i 2 D1i 3 D2i 4 D1i D2i i (3)

where
 Y= annual salary of a junior college teacher (in thousand S$)
X= years of teaching experience
D1i = 0 if female
= 1 otherwise
D2i = 0 if non-Chinese
= 1 otherwise

(a) The term D1i D2i represents the interaction effect. Is this term a dummy
variable? If so, what does this term means? (4 marks)

(b) Show how equation (3) can be used to find the mean salary for a non-Chinese
female. (2 marks)

(c) Show how equation (3) can be used to find the mean salary for a Chinese
female. (2 marks)

(d) Show how equation (3) can be used to find the mean salary for a non-Chinese
male. (2 marks)

(e) Show how equation (3) can be used to find the mean salary for a Chinese
male. (2 marks)

(f) Using the results obtained from (b)-(e) to interpret 4 . (5 marks)

Eviews is used to produce the following regression results (with four t-statistics, one
standard error and one p-value removed) based on cross-sectional data on 1000 junior
college teachers in Singapore:

Dependent Variable: Y
Method: Least Squares
Date: 10/25/05 Time: 11:40
Sample: 1 1000
Included observations: 1000
Variable Coefficient Std. Error t-Statistic Prob.
C 32.0 4.0 A1 0.000
X 1.2 0.2 A2 0.000
D1 2.326 1.0 A3 A6
D2 1.645 1.0 A4 0.10
D1*D2 0.65 A5 6.5 0.000
R-squared 0.686082 Mean dependent var 103.7238
Adjusted R-squared 0.684820 S.D. dependent var 8.951610
S.E. of regression 5.025510 Akaike info criterion 6.071918
Sum squared resid 25129.47 Schwarz criterion 6.096457
Log likelihood -3030.959 F-statistic 543.6556
Durbin-Watson stat 2.060918 Prob(F-statistic) 0.000000
(g) Find the numerical values for A1-A6 in the above Eviews output.
(4 marks)

(h) Construct the 95% confidence interval for the slope parameter of X and
interpret it. (4 marks)

(i) If we now measure Y by S$ instead of by thousands of S$, without

rerunning the regression, what are the new estimated coefficients?
(5 marks)
Selected Formulae
yi = Y i - Y xi = X i - X y i = 1 xi

xi y i X i Y i - n X Y
1 = = , Y = 0 + 1 X
xi2
X i2 - n X 2

ei2 2 X i2
= se( 0 ) =
n - K 1 n xi2

se( 1 ) = TSS = ESS + RSS
xi2

ESS RSS /( n K 1)
2
R = , R 2 1 ,
TSS TSS /( n 1)

2
F = R /K
(1 - R2 ) / (n - K 1 )
d n
h (1 - )
2 1 - n[Var( )]

Prob[ 1 - t/2 se( 1 ) 1 1 + t/2 se( 1 )] = 1 -

Selected Statistical Tables

1. Table for the Normal distribution.
2. Table for the t distribution.
3. Table for the F distribution
4. Table for the Durbin-Watson test statistic.