Question One

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Question One (Sub-total Marks: 11)

For consistency, all numerical results from the calculation should keep 4 digits after the decimal point eg. 0.00125 should be reported or used as 0.0013 (Exceptions: An Excel or Eviews outcome should be reported as it is presented from the package).

1. Present the Eviews regression outcome for the following log-linear model (ln stands for the natural logarithm) and comment on the statistical significance of the estimated coefficients. (Marks: 3)

2. Test the overall significance of model (A1) and state your hypotheses clearly and concisely. (Marks: 2)

3. Re-estimate model (A1) by dropping insignificant variable(s) if applicable at the level of significance of 1%, and the new model is named model (A2). Among the two models (A1) and (A2), which one is better? Explain briefly and precisely. (Marks: 2)

4. Let us assume the sample is drawn from time series data. According to model (A2), is there any evidence of a structural change/instability between the first sample period (observations: 1-33) and the rest of the sample period (observations: 34-66)? Provide your answer briefly and precisely (Marks: 2)

5. If model (A2) represents a Cobb-Douglas production function with four production factors, should the assumption of constant returns to scale in the production process be accepted? Explain briefly and precisely. (Marks: 2)

Question Two (Sub-total Marks: 14)

Consider the following savings function and answer all questions by using regression analysis through Eviews and keeping four digits after the decimal point where applicable

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where the coefficient of income is defined as the marginal propensity to save (MPS). Savings and Income are expressed in millions of dollars.

1. Given your completed database, estimate the savings function model (AA1) and comment on your estimate of the slope coefficient. (Marks: 2)

2. Estimate the following model

Compare your results with the regression outcome of model (AA1). What are the theories behind these models (AA1) and (AA2)? Provide your answer briefly and precisely. (Marks: 4)

3. It is argued that Income in model (AA1) should be measured in billions of dollars. Accept this argument and re-estimate model (AA1) with the new model being named model (AA3).

Compare your estimation results of models (AA1) and (AA3)? Provide your answer briefly and precisely.

Have the R2 values of models (AA1) and (AA3) changed? Justify your answer briefly and precisely. (Marks: 4)

4. An influential banker argued that “savings behaviour in the 21st century (from March 2000 onwards) has changed”. Does your data support this argument? If your answer is “no”, please provide detailed convincing evidence from your data. If you answer “yes”, identify these changes and provide your answer briefly and precisely. (Marks: 4)