# HW2(1) - Econ 4010 Introduction to Econometrics(Spring 2016...

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Econ 4010: Introduction to Econometrics (Spring 2016) Homework 2 Due: Tuesday February 23 Olivier Parent ( [email protected] ) Assignment 1. A standard ’money demand’ function used by macroeconomists has the form ln( m ) = β 0 + β 1 ln( GDP )+ β 2 R , where m is the quantity of (real) money, GDP is the value of (real) gross domestic product, and R is the value of the nominal interest rate measured in percent year. Suppose β 1 = 1 . 5 β 2 = - 0 . 04. What will happen to m if GDP increases by 1% ( R is held constant)? What will happen to m if the interest rate increases from 3% to 4% ( GDP is held constant)? 2. Sales in a company are \$201 million in 2004 and increase to \$205 million in 2006 (a) Compute the percentage increase in sales. Compare this value to the logarithm approximation. (b) Repeat twice the previous question assuming Sales 2006 = 210 and Sales 2006 = 500. (c) Why does the quality of the approximation deteriorate ? 3. Give an interpretation of the coefficient β 1 for each of the following cases: Y i = β 0 + β 1 X i (1) Y i = β 0 + β 1 ln( X i ) (2)

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