Homework 6

1. Problem 8.5 on page 313 (page 253 in the previous edition), part 1 only.

2. Consider the following simple Keynesian macroeconomic model of the U.S. economy.

Y_t = C_t + I_t + G_t + NX_t

C_t = β₀ + β₁YD_t + β₂C_t-1 + ε_1t

YD_t = Y_t – T_t

I_t = β₃ + β₄Y_t + β₅r_t-1 + ε_2t

r_t = β₆ + β₇Y_t + β₈M_t + ε_3t

where:

Y_t = gross domestic product (GDP) in year t
C_t = total personal consumption in year t
I_t = total gross private domestic investment in year t
G_t = government purchases of goods and services in year t
NX_t = net exports of goods and services (exports - imports) in year t
T_t = taxes in year t
r_t = the interest rate in year t
M_t = the money supply in year t
YD_t = disposable income in year t

The endogenous variables are Y_t, C_t, I_t, YD_t, and r_t. The exogenous and predetermined variables are G_t, NX_t, C_t-1, T_t, r_t-1, and M_t.  Find the reduced form equations for this model.

3. (a) For your project, what econometric model do you plan to estimate and what hypothesis or hypotheses do you plan to test? (b) Depending upon whether your data are time-series or cross-sectional, test the model for autocorrelation or heteroskedasticity. (c) If you find a problem with either, explain explicitly how you plan to correct for it. If the tests do not indicate a problem, explain how you would have corrected for the problem had the test come out the other way (that is, no matter how the test comes out, explain how to correct for the problem of heteroskedasticity or autocorrelation as appropriate for your model. You don't have to actually do the correction for this homework (though if it was present, you would do the correction for the project), just explain how to do it.).