INFLAT= B1 + B2Money +B3Output + e

a) Comment on potential problems with the model based on the output

b) Using the above instrument, the model is re-estimated in 'Model 2'. Discuss the 2SLS estimation results compared with the OLS 'MODEL 1' results

Reminder: When performing statistical tests, always state the null and alternative hypotheses, the test statistic, decision rule and the conclusion of the test. To examine the quantity theory of money, Brumm(2005) ["Money Growth, Output Growth, and Inflation: A Re-examination of the Modern Quantity Theory's Linchpin Prediction," Southern Economic Journal, 71(3), 661-667] specifies the following model: INFLAT = B1 + 32MONEY + B3OUTPUT + e Where; INFLAT: the growth rate of the general price level, MONEY: the growth rate of the money supply, OUTPUT: the growth rate of national output. The data set consists of 1995 year data on 76 countries. According to economic theory, we should observe that B, = 0, 2 = 1 and B3 = -1. (See Appendix A output for this question) be similar. Sample questions. Note that these are not questions in the final exam but they may a) Comment on potential problems with the model based on the output. Note that the following four instrumental variables are used in the Hausman test; INITIAL: Initial level of real GDP, SCHOOL: a measure of the population's education attainment, INV: average investment share of GDP, and POPRATE: average population growth. b) Using the above instruments, the model is re-estimated in 'Model 2'. Discuss the 2SLS estimation results compared with the OLS 'Model 1' results. :) Test at the 5% level of significance that B2 = 2. t ~ Z = sample - Sec really really low +END OF SECTION B2 1.0 33131 - 2 that the beta of of 1.013 3 is too standard errors 0. 009 0 422 2. The p-value from the t-stat rable ( or 2 rable) Page 12 of 2 iny, like zero