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Econ 220B, Winter 2007
James Hamilton
Midterm Exam
DIRECTIONS: No books or notes of any kind are allowed.
Answer all questions on
separate paper. 150 points are possible on this exam.
1.) (15 points) Comment
very
brie
f
y on the following statement.
“Economists are
fond of making assumptions but loathe to test them. A prime example arises in the least
squares regression,
y
t
=
x
0
t
β
+
ε
t
, in which a key assumption is that
ε
t
is uncorrelated with
x
t
.
Although many economists make this assumption, it is rare to
F
nd anyone actually
trying to test it by calculating the correlation between the leastsquares residual
e
t
and the
regressors
x
t
to see if it is indeed small. This failure to test a key assumption is an example
of economists’ pigheadedness.”
2.) (15 points) Brie
f
y describe what you see as the connection (if any) between the
GaussMarkov Theorem and Generalized Least Squares.
3.) Suppose
y
t
=
x
0
t
β
+
ε
t
T
−
1
T
X
t
=1
x
t
x
0
t
p
→
Q
(
Q
has full rank
k
)
E
(
ε
2
t
)=
σ
2
E
(
ε
2
t
x
t
x
0
t
)=
S
(
S
has full rank
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This note was uploaded on 03/02/2012 for the course ECON 220b taught by Professor Hamilton,j during the Spring '08 term at UCSD.
 Spring '08
 Hamilton,J

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