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NAME:______________________________ Exam 1
EC 3000-Tansey-Sp 2/28/2012
ENGLISH. (2 Sentence Maximum).
1. (5 pts) What is the macroeconomic theory that the class has been testing in assignment 1
concerning why business cycles occur?
Income has an inverse relation to prices (prices lead income)
Prices have a direct relation to Income (income leads prices)
2. (1 pts) What variable were you assigned to test with respect to this theory?
_______________________
3. (1 pts) From what government agency did the data on that variable
come?________________________
4. (2 pts) Which of the following best describes the macroeconomic importance of your variable?
(circle just one)
a) Definitional component of GDP C,I,G,X,M,T,S
b) Disequilibrium measure unemployment, bankruptcy, cap utilization, inventories
c) Price interest rate, inflation rate, wage rate, exchange rate
d) Output: GDP, income
5. (6 pts) Describe both the sign and the lead/lag relationship (or up to two relationships) that our
macroeconomic theory would suggest your assigned variable with respect to the GDP of the
economy.
a) Hypothesis #1:
b)
Hypothesis #2:
MATH
6. (10 pts) Formulate an equation (or two equations if you had two hypotheses in question #5 above)
that linearly relate GDP (use the variable abbreviation “GDP” in the equation) to your variable .
For your variable use the variable abbreviation “V_” in the equation where the space “_” includes
the numbers (1,2,3…) to express the number of years your variable leads the GDP or the numbers
(-1,-2,-3…) to express the number of years your variable lags the GDP. For example if you lead
your variable by two years you would use “V2”, but if you lagged it three years you would use
“V-3”. For the coefficients (i.e. “parameters” or “constants”) of your equation use lower case
letters.
a) Hypothesis #1:
GDP=a+b*V_
Must have 2 equations for the price variables since they are central to mechanism of cycles.
Definitionalally related variables should have zero or small leads and lags
b) Hypothesis #2:
V-_=a+b*GDP
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7. (5 pts) Each of your hypotheses in 5 reduces to a restriction on one of the parameters (constants)
of your equation in question #6. For example if the parameter, “a”, is hypothesized to be
positive you would write “a>0”.
a) Hypothesis #1:
“b” Negative for price variables. GDP=a+b*V_
b) Hypothesis #2:
“b” Negative for unemployment rate, positive for all else. V-_=a+b*GDP
8. (5 pts) Given how the economy behaves over the long run, which of the following would you
expect to characterize the behavior of your variable through time? (circle just one)
a) Explosive
b) Oscillatory Explosive
c) Limit Cycle
d) Damped oscillatory
e) damped
STATISTICS
9. (2 pts) What is the name of the statistical procedure that is used in assignment 1 to test the
statistical significance of the data to test our hypotheses? Regression analysis
10. (2 pts) What is the name of the test that is used to test the significance of the coefficient of your
equation? F-test or t-test. Prob value or significance-F
DATA
11. (5 pts) Fill in the following table with the proper transformation numbers for the data that is in
the “levels” column.
Date
2010
2011
2012
Levels
10
12
15
Change
Change of Change
% change
2
3
1
.2
.25=(15-12)/12
12. (5 pts) Explain the advantages and disadvantages of using logarithms relative to each of the
transformations that you have just computed with respect to analyzing data over long periods of
time and where inflation may be reflected in a variable.
Better than levels because it transforms constant changes into constant percentage changes represented by
the slope of the logarithmic line. “Change” and “change of change” are still distorted by a rising base
through time which makes the logarithm more useful, but both transformations show more of the
variability of a variable which is useful for tracking causal relationships. However, percentage change is
better than all of the measures for eliminating problems of the base through time, eliminating time trends,
while preserving the ability to track causal relationships by highlighting variability. Nevertheless, the
percentage change regressions generally have low R-square and F-statistics; it’s hard to find significant
relationships.
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13.
One of you had the prime rate as your assigned variable and constructed the following
table of data (I’ve only shown the first couple of years and have cut off the rest.
Dependent
% chg
GDP
0.020
0.020
-0.009
0.072
0.025
Independent
Prime Rate
3.770
4.200
3.830
4.480
4.820
L1
3.770
4.200
3.830
4.480
L2
3.770
4.200
3.830
L3
3.770
4.200
L4
3.770
14. (3 pts) Which of the following is being tested by the student? (how this should have
read…way too tricky for even me to get )
a. The growth rate of GDP determines the prime rate and is shown with various leads to
the prime rate.
b. The growth rate of GDP determines the prime rate and is shown with various lags to
the prime rate.
c. The prime rate is the dependent variable and is shown with various leads to the
growth rate of GDP
d. The prime rate is the independent variable and is shown with various leads to the
growth rate of GDP
e. The growth rate of GDP determines the % change of the prime rate and is shown with
various leads to the prime rate.
f. The growth rate of GDP determines the % change of the prime rate and is shown with
various lags to the prime rate.
g. The % change of the prime rate is the dependent variable and is shown with various
leads to the growth rate of GDP
h. The % change of the prime rate is the independent variable and is shown with various
leads to the growth rate of GDP
15. (2 pts) Following are the correlations corresponding to the last five columns of the data at
the top of this page:
Correlation
-0.180
-0.346
-0.104
0.098
0.119
What is the command in EXCEL that gives these correlations?=correl(,)
16. (2 pts) Circle in problem #15 above which of the five correlations is most likely
statistically significant from these correlation tests.
17. (5 pts) Are these results consistent with the macroeconomic theory we have been studying
in class (hint: look at what you answered in question #1 above): YES! Prices drive the
economy in the opposite direction with a one year lead.
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18. Following is a printout the relationship between % change in GDP to the % change in the
CPI.
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.251675
0.06334
0.051332
0.049339
80
ANOVA
df
1
78
79
SS
0.013
0.190
0.203
Coefficient
s
0.024
Standar
d Error
0.007
t Stat
3.28
Pvalue
0.00
0.320
0.139
2.29
0.02
Regression
Residual
Total
Intercept
% Change Comsumer Price Index(All Goods,
Nost Seasonally Adjusted)
MS
0.03
.002
F
5.27
Significanc
eF
0.024
19. (3 pts). Write down the explicit linear equation (with the regression estimates for the
parameters) of the equation relating the dependent variable of % change of GDP (GDP%)
to the percentage change in prices (%^P)
GDP% = .024+.32*%^P
20. (1 pts) Is the relationship significant according to the results?
(circle one) Yes No
21. (2 pts) How do you know that it is or is not significant based on the results?
F-test or t-test. Prob value or significance-F. of .024
22. (3 pts.) What percentage of the variation in the % change in the GDP has been
explained by the percentage change in the price index according to the results? (write
down the percentage in the blank)? 6.334%
23. (3 pts) Do the above results confirm the macroeconomic theory that we posited (i.e.
question #1) with the right sign at the 95% confidence level? (circle one)
Yes
No No, only if there were a lead of price on GDP.
24.
(3 pts.) At this particular time in the economy is the relationship between these
two variables being maintained based on what you know from reading the media?
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Can make the case either way. Graded on whether you are consistent in your answer and
correctly state what is happening in the economy.
25.
(3 pts) Based on where the two variables are today (so… where are the % change of both
GDP and prices today?) , and assuming that our macro theory (question #1) holds , which of the
following predictions would be most likely to occur over the next year (circle one): (Graded on
whether you are consistent in your answer to previous two questions and correctly state what is
happening in the economy but best answer is)
*
The rate of decline currently of the GDP should become larger in magnitude.
*
The rate of decline currently of the GDP should become smaller in magnitude.
*
The rate of rise currently in the GDP should become larger in magnitude.
*
The rate of rise currently in the GDP should become smaller in magnitude.
26. (10 pts.). Why is Greece in trouble?
Its debt/GDP ratio is above 1.0 and it cannot possibly pay debt back.
27. (15 pts.) In 2008, the economy “froze up.” We had Lavaughn Henry of the Federal Reserve
come to class and explain that the Federal Deposit Insurance Corporation (FDIC) did not have
enough money to cover insured deposits if even one of the largest banks were to fail. Answer
the following two questions: (a) What was done to prevent the economy from freezing up, and
(b) what do you think should have been done if you disagree with what was done or, if you agree
with what was done, what else could have been done to have unfrozen the economy?
(a) The Fed forced the banks to receive federal funds so that everyone could trust others in the
market to survive. Then the Fed provided enough liquidity to the banking system through
purchase of “toxic assets.” By holding the toxic assets, the market for these assets was
reestablished so that they had enough value to be worth purchasing. That in turn allowed banks
to sell such assets without taking a total loss on them. The Fed also took over Fannie Mae and
Freddy Mac that held most mortgages ensuring that they would continue to operate. It
effectively bailed out AIG, GM, and Chrysler ensuring those jobs would continue and the
markets for many derivatives would not be derailed.
(b) If you have a better plan than the previous one, I’m nominating you to head the Fed.