Introduction to Econometrics 3rd Edition by James Stock, Mark Watson

Exercise 13

This question refers to the panel data regressions summarized in Table 12.1.
a. Suppose that the federal government is considering a new tax on cigarettes that is estimated to increase the retail price by $0.50 per pack. If the current price per pack is $7.50, use the regression in column (1) to predict the change in demand. Construct a 95% confidence interval for the change in demand.
b. Suppose that the United States enters a recession and income falls by 2%. Use the regression in column (1) to predict the change in demand.
c. Suppose that the recession lasts less than 1 year. Do you think that the regression in column (1) will provide a reliable answer to the question in (b) Why or why not
d. Suppose that the ^-statistic in column (1) was 3.6 instead of 33.6. Would the regression provide a reliable answer to the question posed in (a) Why or why not