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ETC2410 - ETC3440 - ETW2410 - BEX2410 - ETS2410

Introductory Econometrics
Mid-Semester Test - 24 August 2018

• Read all answers and circle the option that is the best answer to the question out of the 5 choices
provided.

• When “all of the above” is the last possible answer, there is a possibility that all answers are correct.
If that is the case, “all of the above” is considered to be the best answer.

• If you circle more than one option for a question, you get zero for that question.

• if you circle one option, say (b) but want to change your chosen option to (a), cross (b) out and write
“(a) is my final answer” and draw a box around it.

1. To compile the South Africa Demographic and Health Survey (SADHS) data set, trained teams of
interviewers collected data in face-to-face interviews with adults from over 11,000 nationally repre-
sentative households in South Africa in 2016. SADHS is

(a) a panel data set.

(b) a cross sectional data set.
(c) a time series data set.
(d) a pooled time series-cross section data set.
(e) an experimental data set.
(1 mark)

2. Which of the following statements is not true?

(a) Randomised controlled trials are the best means for measuring causal relationships.
(b) Correlation is not causation.
(c) In predictive modelling, the variables that are used as predictors need not cause the variable
that they try to predict.
(d) Time series data are ordered whereas cross section data are not.
(e) Time series observations are always i.i.d.
(1 mark)

3. We are deciding whether to undertake a project whose costs and benefits are uncertain. After
some analysis, we have determined that the revenue R from the project has expected value $5m and
standard deviation $0.8m, the cost C of the project has expected value $3.2m and standard deviation
$0.6m, and R and C are statistically independent. This implies that profit π = R − C has expected
value $1.8m with variance

(a) 0.8 − 0.6 = 0.2

(b) (0.8 − 0.6)2 = 0.04
(c) 0.82 − 0.62 = 0.28
(d) 0.82 + 0.62 = 1.00
(e) (5 − 0.32)2 = 3.24
(1 mark)

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4. We are asked to forecast average daily electricity demand in Melbourne. The electricity company
has given us a data set that includes average daily electricity usage in mega watts and average daily
temperature in degrees Celsius for every day in the past 6 months. We look at the summary statistics
and histogram of the average daily temperatures (provided below) and notice that the average daily
temperature for one day is recorded as 99◦ C. Based on this information, which of the following
courses of action is the most sensible?

(a) To proceed with estimating a model.

(b) To find a statistical test to determine if the observation whose value is 99 is an outlier, and
discard or keep that observation in the analysis based on the outcome of that test.
(c) To delete the observation whose value is 99 because it is obviously an error and then proceed to
estimating a model.
(d) To keep the observation whose value is 99 in the analysis because “the data never lies.”
(e) To change the value of the outlying observation from 99 to 9 and then proceed to estimating a
model.
(1 mark)

5. The returns to shares in two companies have mean 5% and 6% and variance 16 and 25, respectively.
The correlation coefficient between these returns is 0.1. The covariance between these returns is

(a) 5 × 6 = 30
(b) 16 × 25 = 400
(c) 0.1 × 16 × 25 = 40
√ √
(d) 0.1 × 16 × 25 = 2
(e) √ 0.1√ = 0.005
16× 25
(1 mark)

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6. In tutorial 2, you downloaded the quarterly nominal hourly wage index series published by the
Australian Bureau of Statistics (plotted below). Based on the tutorial exercise, which of the following
statements is the most accurate?

(a) The plot definitely shows that mean hourly wage has been constant over time.
(b) The plot definitely shows that hourly wage has had a constant mean and constant variance over
the sample period
(c) The plot definitely shows that there has been an upward trend in hourly wage. The data may
have other important features that are dominated by the trend and can only be seen after the
trend is removed.
(d) The plot definitely shows that hourly wage has had an upward trend and no quarterly seasonality.
(e) The plot definitely shows that the standard of living of Australian wage earners has deteriorated
over time.
(1 mark)

7. According to an expert, the annual growth rate of the real GDP in Malaysia in 2019 is governed by
the following probability density function:

GDP growth rate (%) 4 5 6

probability 0.1 0.5 ?

The expected growth rate of real GDP in Malaysia in 2019 according to this expert is:

(a) 1 − 0.1 − 0.5 = 0.4%

(b) 4 × 0.1 + 5 × 0.5 = 2.9%
4+5+6
(c) 3 = 5%
(d) 4 × 0.1 + 5 × 0.5 + 6 × 0.4 = 5.3%
(e) a random variable
(1 mark)

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 Questions 8 and 9 refer to the following problem: According to an expert, the inflation rate and the
cash rate (the interest rate set by the Reserve Bank of Australia) in Australia in the fourth quarter
of 2018 are governed by the following joint probability density function:

cash rate (%) ↓ \ inflation rate (%) → 1 2 3

1.25 0.15 0.10 0.00
1.50 0.15 0.30 0.05
1.75 0.10 0.10 0.05

8. According to this expert, the expected value of the inflation rate in the fourth quarter of 2018 is

(a) 1 × 0.4 + 2 × 0.5 + 3 × 0.1 = 1.7%

1+2+3
(b) 3 = 2%
(c) 1 × 1.25 × 0.15 + 1 × 1.50 × 0.15 + 1 × 1.75 × 0.10 + 2 × 1.25 × 0.10 + 2 × 1.50 × 0.30 + 2 × 1.75 ×
0.10 + 3 × 1.25 × 0.00 + 3 × 1.50 × 0.05 + 3 × 1.75 × 0.05 = 2.575%
(d) a random variable
(e) 1.25 × 0.25 + 1.50 × 0.5 + 1.75 × 0.25 = 1.50%
(1 mark)

9. According to this expert, the expected value of the inflation rate conditional on cash rate being 1.75%
in the fourth quarter of 2018 is

(a) 1 × 0.4 + 2 × 0.5 + 3 × 0.1 = 1.7%

0.10 0.10 0.05
(b) 1 × 0.25 + 2 × 0.25 +3× 0.25 = 1.8%
1+2+3
(c) 3 = 2%
(d) a random variable
(e) 1 × 0.10 + 2 × 0.10 + 3 × 0.05 = 0.45%
(1 mark)

10. Over the past four weeks, the average daily return on Qantas shares has been r̄Q = 0.02% and the
sample variance of daily return on Qantas shares has been σ̂Q2 = 1.2. During the same period, the

average daily return on ASX200 index has been r̄A = 0.008% with sample variance σ̂A 2 = 0.24. The

sample covariance between these returns has been σ̂A,Q = 0.42. If we estimate a regression of daily
returns to Qantas shares on a constant and daily returns to ASX200 index using OLS, the estimated
slope coefficient will be
2 + σ̂ 2 + 2 × σ̂
(a) σ̂Q A A,Q = 1.2 + 0.24 + 2 × 0.42 = 2.28
σ̂A,Q 0.42
(b) σ̂Q ×σ̂A = √ √
1.2× 0.24
= 0.78
σ̂A,Q 0.42
(c) 2
σ̂Q
= 1.2 = 0.35
σ̂A,Q 0.42
(d) 2
σ̂A
= 0.24 = 1.75
r̄Q 0.02
(e) r̄A = 0.008 = 2.5
(1 mark)

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 Questions 11, 12 , 13 and 14 refer to the following problem. We want to study the trade-off
between time spent sleeping and working. We have collected data from a random sample of 706
individuals on the following variables:

sleep minutes of sleep per week

work minutes of work per week
educ years of education
age age in years

and we have estimated the following regression:

11. Which of the following is the correct way of reporting the regression results in equation form?

(a) sleep = 3638.25 − 0.15work − 11.13educ + 2.2age + u

(b) sleep = 3638.25 − 0.15work − 11.13educ + 2.2age

d = 3638.25 − 0.15work − 11.13educ + 2.2age + u

(c) sleep

d = 3638.25 − 0.15work − 11.13educ + 2.2age + û

(d) sleep

d = 3638.25 − 0.15work − 11.13educ + 2.2age

(e) sleep
(1 mark)

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12. The estimated coefficient of educ tells us that

(a) keeping age and work time constant, an additional year of education reduces the predicted sleep
time by 11.13 minutes per week
(b) educated people sleep 11.13 minutes per week less than uneducated people on average
(c) educated people sleep 11.13 minutes per week less than uneducated people of the same age on
average
(d) as education increases by one year, sleep time per week decreases by 11.13 minutes
(e) as education decreases by 11.13 years, sleep time per week increases by 1 minute per week, all
else constant
(1 mark)

13. If sleep time and work time per week were both measured in hours instead of minutes, then

(a) the estimated coefficient of work would stay the same, but all other estimated coefficients would
be divided by 60
(b) the estimated coefficient of work would stay the same, but all other estimated coefficients would
be multiplied by 60
(c) all estimated coefficients would be multiplied by 60
(d) all estimated coefficients would be divided by 60
(e) the estimated coefficient of work would be multiplied by 60, but all other estimated coefficients
would be divided by 60
(1 mark)

14. The R-squared of the regression tells us that

(a) the residual sum of squared is 11% of the total sum of squared
(b) 11% of the variation in sleep time is explained by variations in work time, years of education
and age in this sample
(c) all but 11% of the variation in sleep time is explained by variations in work time, years of
education and age in this sample
(d) the sum of squares of correlation coefficients between sleep and work, sleep and educ and sleep
and age is 0.11
(e) the estimated equation fits 11% of the sample observations perfectly with zero error
(1 mark)

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 Questions 15 and 16 refer to the following problem: We have data on the hourly wage of 5
individuals, 2 of whom are female and the other 3 are male. We have generated two dummy variables.
The first one is f emale which is equal to 1 if the individual is female and is equal to zero otherwise.
The other dummy variable is male which is equal to 1 if the individual is male and is equal to zero
otherwise. We estimate a regression of wage on these two dummy variables without a constant term.
The X matrix is:  
0 1
0 1
 
0 1 .
 
1 0
1 0

15. The X0 X matrix is

(a) a diagonal matrix

(b) a square matrix
(c) an invertible matrix
 
2 0
(d) equal to
0 3
(e) all of the above
(1 mark)

16. The estimated coefficient of the f emale dummy variable is

(a) the average wage of the 3 male individuals in the sample

(b) the average wage of all 5 individuals in the sample
(c) the average wage of the 2 female individuals in the sample
(d) the mean wage of all females in the population
(e) the difference between the average wage of the 2 female and the 3 male individuals in the sample
(1 mark)

Questions 17, 18, 19 and 20 refer to the multiple regression model

yi = β0 + β1 xi1 + β2 xi2 + ui , i = 1, . . . , 10

which in matrix notation is

y = X β + u .
(10×1) (10×3) (3×1) (10×1)

We denote the estimated model by

y = Xβb + u
b
in which βb is the OLS estimate of β and u
b is the vector of OLS residuals.

17. X0 u
b = 0 means that

(a) E(u | X) = 0
(b) columns of X are linearly independent
(c) the vector u
b is orthogonal to each of the 10 rows of X
(d) the vector u
b is orthogonal to each of the 3 columns of X
(e) the vector u
b is a linear combination of columns of X
(1 mark)

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18. If we know that the columns of X are linearly independent and E(u | X) = 0, then βb

(a) will be the best linear unbiased estimator of β

(b) will be an unbiased estimator of β but may not be BLUE
(c) will be normally distributed
(d) will be equal to β
(e) will be biased
(1 mark)

19. y
b = Xβb is the predicted y from the estimated model. Which of the following statements is not
correct?

(a) y
b is a linear combination of columns of X
(b) y
b is the closest vector to y in the column space of X
(c) y
b is orthogonal to u
b
(d) The square of the length of the vector y
b plus the square of the length of the vector u
b equals the
square of the length of the vector y
(e) y
b is orthogonal to the column space of X
(1 mark)

20. E(u | X) = 0 implies that

(a) X0 u
b=0
(b) columns of X are linearly independent
(c) E(y | X) = Xβ
(d) βb = (X0 X)−1 X0 y
(e) the sum of the 10 OLS residuals is zero
(1 mark)

———– THE END ———–

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