This is due in lab on either 3/5 or 3/7.

1. Problem 9.4 on page 338 (problem 9.3, page 276 of the previous edition).

2. For the model

Q_{t} = a_{0} + a_{1}P_{t} + a_{2}Y_{t} + a_{3}X_{t} + a_{4}Z_{t} + u_{t}P_{t} = b_{0} + b_{1}Q_{t} + b_{2}Y_{t} + b_{3}W_{t} + v_{t}Y_{t} = c_{0} + c_{1}P_{t} + c_{2}W_{t} + w_{t}

Determine whether each equation is under, exactly, or over identified. Assume that Q, P, and Y are endogenous, and that the constant, X, Z, and W are exogenous.

3. Answer the following questions about your project:

(i) Do you expect any measurement problems, i.e. do you expect to have errors in variables problems? If so, what effect will that have on your estimates and test statistics (if you don't think this will be a problem, say that and explain why, and then say, but if I did have this problem it would cause the following difficulties and then describe the effect it would have on the estimates and test statistics). How can the problem be fixed?

(ii) Are there any important omitted variables? If so, what effect would the omitted variables have on the estimates and test statistics? (And again, even if you think you have every important variable, show that you understand this issue by explaining what types of problems it causes).

(iii) Do you expect problems with endogeneity bias (endogenous variables on the right-hand side of the equation that are correlated with the error term)? Think hard about this one, and if you do have this problem, what is the solution?

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