SCFUNCEST - Intro Macro N. Sheflin A Taste of Macro...

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1 Intro Macro N. Sheflin A Taste of Macro Econometrics Estimating a Consumption Function and Making a Forecast The point of this exercise is to introduce you to what (many/most) economists actually do – they use statistics, math, computers to estimate, test and predict economic relationships developed from economic theory. i.e., they do ECONOMETRICS Congratulations . You are doing so well in Macro, that the President wants you to provide some econometric analysis in which you will use mathematical, statistical and computer tools to estimate, test and predict economic relationships (that’s the definition of econometrics ). If done well, you might become an economic advisor to the President. Specifically, he is concerned with how aggregate consumption will do for the rest of the year. You will specify, estimate, and test a Keynesian consumption function, and use it to make a forecast of consumption for this year, and estimate the multiplier with the help of www.economagic.com There will be some questions from this assignment on a future homework assignment, quiz, and the final, not to mention when you visit the White House. So make sure you can answer the questions in CAPITALS below. Once in economagic, the basic idea is that you are going to retrieve data on real consumption and real gdp (as a measure of income), and on the prime interest rate, and save them in a ‘personal workspace’; then you are going to do a scatter plot (graph), and then a regression and then some hand calculations. Then you will run a multiple regression. A. Specifying a Consumption Function and Why? WHY WOULD THE PRESIDENT BE CONCERNED WITH FORECASTING CONSUMPTION? o to Forecast GDP – since consumption is the largest component of GDP, approximately 2/3 of it o To estimate the mpc and multiplier and this the size of the effect of a change in government spending (or tax) o Test C function theory (mpc>0)- is there really a relationship between consumption and income? WHAT DOES KEYNESIAN THEORY SAY ABOUT THE DETERMINANTS OF CONSUMPTION? o

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SCFUNCEST - Intro Macro N. Sheflin A Taste of Macro...

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