E3C7C6C2d01 - Suggested Answers to Problem Set 1 Econ 441...

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Suggested Answers to Problem Set 1 Econ 441 Fall 07 Prepared by Megan Ritz Chapter 1 #5 The national debt was 420 billion pounds and inflation was 1.6 percent, so the real value of the debt decreased by 420*.016 = 6.72 billion pounds. This decrease in the real value of debt can be counted as government revenue. Chapter 2 #5 The switching will bias the results if the switches are correlated with students’ test scores. For example, parents might think smaller classes are better for their kids. If the parents of higher ability kids are more involved, they might be more likely to switch their kids to smaller classes. This would bias the results towards the finding that smaller classes give better outcomes. Alternatively, suppose parents of low ability kids are more likely to switch their kids to smaller classes (maybe they think their kid needs more one on one attention). That would bias the results towards the finding that smaller classes don’t improve test scores. On the other hand, if the switches are uncorrelated with ability, we wouldn’t expect the switches to bias the results. For example, if kids are switching because one class fits in their schedule better than another, that might not bias the results. Chapter 2 #6 You need to do a better analysis to try to control for other things that might have changed over the time period. For a difference in difference analysis you would find the difference in savings before and after the tax cut in these five states and then compare it to the difference in savings over the same time period in other states where there was no tax cut. For this to be valid, all the states need to be just the same except that some
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