Deck 5: Sample Exam for Chapters 12-16

Question 1

You have been hired to forecast GDP (Y) for the Caribbean island of Tabasco. Tabasco has domestic food (F) and shelter (S) industries, a tourist (T) industry, and an export (X) industry.
All tourists come from the United States, while the exports are split between Mexico and the
United States. Investment is virtually zero, and government expenditures (G) can be considered to be exogenously determined. Imports (I) are a function of GDP. Thus the structural equations for
a simultaneous model of the Tabascan economy would look something like:
Y = F + S + T + X + G - I
F = f_F (Y, ?)
S = f_S (Y, ?)
T = f_T (USGNP, ?)
X = f_X (USGNP, MEXICOGNP, ?)
I =f_I (Y, ?)
G = exogenous
(a) Develop a theory for Tabasco's economy. Then choose which predetermined variables you would like to add to the simultaneous system and specify to which of the five stochastic structural equations (see question marks) you would like to add them. Explain your reasoning.
(b) Comment on the identification properties of each of the five stochastic equations in the system you outlined in your answer to part (a) above.
(c) How should the coefficients of the system be estimated?
(d) What technique would you use to forecast Tabasco's GNP? Why?

Answer 1

OK, OK, we know this will be hard to grade, since each answer will be different depending on
the exact variables and equations added, but this question tends to work well. The student will be forced to apply the identification, estimation, and forecasting techniques to a system of his or her own choosing in much the same way he or she will have to in his or her work later on.
The key to the questions on estimation and forecasting have to do with the size and importance of the feedback loops (as compared to exogenous factors in determining GDP). In this case, there is a good chance that the most accurate forecast of Tabasco's GDP would be based on a "simplified reduced-form" equation that included only USGNP and MEXICOGNP as explanatory variables.

Question 2

Suppose you've been hired by your school's admissions department to help them decide whether to change admissions procedures. You are given the files of all of the students in the last graduating class (including those students who didn't graduate) and told to build a model to explain why some admitted students graduate and others don't.
(a) Specify the functional form you would use in building such a model and carefully explain why that form is appropriate.
(b) Specify the independent variables you would include in the equation and briefly explain how they apply to the dependent variable in question.
(c) Carefully explain the meaning of the coefficient of your first independent variable.

Answer 2

The appropriate functional form is the logit because of the problems with the linear probability model outlined in Section 13.1. The key to choosing independent variables is the type of variable suggested; some students will misunderstand the disaggregate nature of the variables required by such a study and will suggest variables that are constant for all observations in the dataset. Each coefficient tells the impact of a one-unit change in the independent variable in question (holding constant all the other independent variables in the equation) on the log of the odds that the person graduated. his or her

Question 3

Briefly identify the following in words or equations as appropriate:
(a) Problems with ad hoc distributed lags
(b) Unconditional forecasting
(c) Moving-average process
(d) How to test for serial correlation in a dynamic model
(e) Difference-in-differences estimator

Answer 3

(a) See Section 12.1.
(b) See Section 15.2.
(c) See Section 15.3.
(d) See Section 12.2.
(e) See Section 16.2.

Question 4

Virtually all of Chapter 14 is spent discussing the violation of the assumption that the error term is independent of the explanatory variables.
(a) Under what circumstances might that assumption be violated?
(b) What would the violation of that assumption be likely to cause?
(c) What general technique is used to rid the equation of this problem? Specifically, how does
it work?