Answer Key

Testname: UNTITLED1.TST

ESSAY. Write your answer in the space provided .

1) (a) For every one inch increase in the average height of their parents, the student's height increases by 0.73 of an
inch. There is no interpretation for the intercept.

(b) , t=2.72, for , the critical value for a two-sided alternative is 2.58. Hence we reject the

null hypothesis in (i). For the slope we have , t=-2.70, for , the critical value for a
two-sided alternative is 2.58. Hence we reject the null hypothesis in (ii).

(c) 19.6 + 0.737 ˛ 0.06 = 70.74.

(d) ((0.73 - 1.96 ˛ 0.10, 0.73 + 1.96 ˛ 0.10) = (0.53, 0.93).

(e) Tall parents will have, on average, tall students, but they will not be as tall as their parents. Short parents will
have short students, although on average, they will be somewhat taller than their parents.

(f) This is an example of mean reversion. Since the aristocracy was, on average, taller, he was concerned that their
children would be shorter and resemble more the rest of the population. If this conclusion were true, then
eventually everyone would be of the same height. However, we have not observed a decrease in the variance in
height over time.

2) To derive the OLS estimator, minimize the sum of squared prediction mistakes .

Taking the derivative with respect to results in

Setting the derivative to zero then results in the OLS estimator:

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Answer Key
Testname: UNTITLED1.TST

3) (a) You would require a negative sign. Countries that are far ahead of others at the beginning of the period
would have to grow relatively slower for the others to catch up. This represents unconditional convergence,
whereas the neoclassical growth model predicts conditional convergence, i.e., there will only be convergence if
countries have identical savings, population growth rates, and production technology.

(b) An increase in 10 percentage points in RelProd60 results in a decrease of 0.00006 in the growth rate from 1960
to 1990, i.e., countries that were further ahead in 1960 do grow by less. There are some countries in the sample
that have a value of RelProd60 close to zero (China, Uganda, Togo, Guinea) and you would expect these countries
to grow roughly by 2 percent per year over the sample period. The regression R2 indicates that the regression has
virtually no explanatory power. This is confirmed by the very low t-statistic, indicating that the slope is not
statistically significant. The result is not surprising given that there are not many theories that predict
unconditional convergence between the countries of the world.

(c) Using homoskedasticity-only standard errors has no effect on the OLS estimator. The t-statistic remains
small and is certainly below the critical value. The results are less reliable since there is no reason to believe that
the error variance is homoskedastic.

(d) Judging by the size of the slope coefficient, there is strong evidence of unconditional convergence for the
OECD countries. The regression R2 is quite high, given that there is only a single explanatory variable in the
regression. However, since we do not know the sampling distribution of the estimator in this case, we cannot
conduct inference.
4) The 90% confidence interval for the slope is calculated as follows:

(2.28 - 1.645 ˛ 0.52, 2.28 + 1.645 ˛ 0.52) = (1.42, 3.14).

The corresponding predicted effect of a unit change in the student-teacher ratio is the same, since the change in X
is 1.
The 99% confidence interval for the slope coefficient and the unit change in the student-teacher ratio is:

(2.28 - 2.58 ˛ 0.52, 2.28 + 2.58 ˛ 0.52) = (0.94, 3.62).

The 99% confidence interval corresponds to a smaller size of the test. This means that you want to be "more
certain" that the population parameter is contained in the interval, and that requires a larger interval.

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Answer Key
Testname: UNTITLED1.TST

5) The regression , where ESS is given by .

But and . Hence ,

and therefore . Using small letters to indicate deviations from mean, i.e., ,

we get that the regression . The square of the correlation coefficient is

. Hence the two are the same.

Correlation does not imply causation. Income is a regressor in the consumption function, yet consumption enters
on the right-hand side of the GDP identity. Regressing the weight of individuals on the height is a situation
where causality is without doubt, since the author of this test bank should be seven feet tall otherwise. The
authors of the textbook use weather data to forecast orange juice prices later in the text.

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Empirical Part
Part 1

TESTSCR vs. STR

720

700

680
TESTSCR

660

640

620

600
12 14 16 18 20 22 24 26

STR

Part 2 and 3
Dependent Variable: TESTSCR
Method: Least Squares
Date: 05/05/03 Time: 22:22
Sample: 1 420
Included observations: 420
White Heteroskedasticity-Consistent Standard Errors & Covariance
TESTSCR=C(1)+C(2)*STR

Coefficient Std. Error t-Statistic Prob.

C(1) 698.933 10.36436 67.43619 0

C(2) -2.279808 0.519489 -4.38856 0

R-squared 0.05124 Mean dependent var 654.1565

Adjusted R-squared 0.04897 S.D. dependent var 19.05335
S.E. of regression 18.58097 Akaike info criterion 8.686903
Sum squared resid 144315.5 Schwarz criterion 8.706143
Log likelihood -1822.25 Durbin-Watson stat 0.129062

Dependent Variable: READ_SCR

Method: Least Squares
Date: 05/05/03 Time: 22:27
Sample: 1 420
Included observations: 420
 White Heteroskedasticity-Consistent Standard Errors & Covariance
READ_SCR=C(1)+C(2)*STR

Coefficient Std. Error t-Statistic Prob.

C(1) 706.4485 10.71934 65.90412 0

C(2) -2.621026 0.538504 -4.86724 0

R-squared 0.060808 Mean dependent var 654.9705

Adjusted R-squared 0.058561 S.D. dependent var 20.10798
S.E. of regression 19.51032 Akaike info criterion 8.784515
Sum squared resid 159112.8 Schwarz criterion 8.803754
Log likelihood -1842.748 Durbin-Watson stat 0.185459

Dependent Variable:
MATH_SCR
Method: Least Squares
Date: 05/05/03 Time: 22:28
Sample: 1 420
Included observations: 420
White Heteroskedasticity-Consistent Standard Errors & Covariance
MATH_SCR=C(1)+C(2)*STR

Coefficient Std. Error t-Statistic Prob.

C(1) 691.4174 10.43277 66.27361 0

C(2) -1.938591 0.521657 -3.71622 0.0002

R-squared 0.038241 Mean dependent var 653.3426

Adjusted R-squared 0.03594 S.D. dependent var 18.7542
S.E. of regression 18.4141 Akaike info criterion 8.668861
Sum squared resid 141735.1 Schwarz criterion 8.688101
Log likelihood -1818.461 Durbin-Watson stat 0.215578

The slope coefficient is lower in the regression of math scores on student-teacher ratio.
Hence it pays more to reduce class size in reading classes than in math classes. The
increase in score for reading due to the smaller class size is higher than for math.

Part 4
The p-values for slope coefficients are less than 0.05 in all regressions. Hence we reject
the null hypothesis of no effects in all cases. It would probably make more sense to do a
one sided test in this case (the null hypothesis that the slope coefficient is zero against the
one-sided alternative that it is less than zero), as many people think that smaller classes
provide a better learning environment. We would reject the null hypothesis in this case
too.

Confidence intervals:
− 2.27 ± 1.96 × 0.52
− 2.62 ± 1.96 × 0.54
− 1.94 ± 1.96 × 0.52
The confidence intervals are very close to each other. That suggests that the effects are
very similar in all three cases.

Part 5
Dependent Variable: TESTSCR
Method: Least Squares
Date: 05/05/03 Time: 22:59
Sample(adjusted): 1 394 IF EL_PCT=0
Included observations: 49 after adjusting endpoints
White Heteroskedasticity-Consistent Standard Errors & Covariance
TESTSCR=C(1)+C(2)*STR

Coefficient Std. Error t-Statistic Prob.

C(1) 601.586 19.03123 31.61047 0

C(2) 3.321851 1.006675 3.299825 0.0019

R-squared 0.17997 Mean dependent var 662.6347

Adjusted R-squared 0.162523 S.D. dependent var 14.0524
S.E. of regression 12.85989 Akaike info criterion 7.986063
Sum squared resid 7772.703 Schwarz criterion 8.06328
Log likelihood -193.659 Durbin-Watson stat 0.2004

Dependent Variable: TESTSCR

Method: Least Squares
Date: 05/05/03 Time: 23:01
Sample(adjusted): 2 420 IF EL_PCT>0
Included observations: 371 after adjusting endpoints
White Heteroskedasticity-Consistent Standard Errors & Covariance
TESTSCR=C(1)+C(2)*STR

Coefficient Std. Error t-Statistic Prob.

C(1) 705.6615 11.78611 59.87229 0

C(2) -2.65685 0.585447 -4.53816 0

R-squared 0.063977 Mean dependent var 653.0368

Adjusted R-squared 0.06144 S.D. dependent var 19.3575
S.E. of regression 18.75341 Akaike info criterion 8.706005
Sum squared resid 129773.8 Schwarz criterion 8.727117
Log likelihood -1612.96 Durbin-Watson stat 0.158846

According to the results, when there are no English learners in class, bigger class sizes
correspond to higher scores.