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Ees401: Fundamentals Of Econometrics Question Paper

Ees401: Fundamentals Of Econometrics

Course:Bachelor Of Economics

Institution: Kenyatta University question papers

Exam Year:2012

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2011/2012
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
ECONOMICS
EES 401:
FUNDAMENTALS OF ECONOMETRICS II
===============================================================
DATE: WEDNESDAY 28TH MARCH 2012 TIME: 11.00 A.M. – 1.00 P.M.

INSTRUCTIONS
1.
This Paper consists of FIVE (5) Questions.
2.
Answer Question ONE (Compulsory) and any other TWO (2) Questions.
3.
Show all your working clearly as neat work will earn bonus points
4.
Statistical tables are attached.

Question One (30 marks)
You are given the following information on 15 employees of a particular company.
Monthly Salary
Gender
Specialization
(Ksh. 000’s
38
Female
Marketing
31
Male
Marketing
19
Male
Economics
28
Female
Economics
33
Male
Marketing
23
Female
Economics
33
Female
Economics
32
Female
Marketing
27
Male
Economics
36
Male
Marketing
Page 1 of 4
20
Male
Economics
36
Female
Economics
25
Male
Economics
27
Male
Marketing
41
Female
Marketing

a)
Regress monthly salary on gender and specialization assuming all the assumptions of
the classical linear regression model are satisfied; and interpret the estimated model,
given that Female = 1, Marketing = 1

(12 marks)

b)
Derive the Variance – Covariance matrix of the above data and specify the standard
errors of the regression coefficients.

(6 marks)

c)
Test the statistical significance of each coefficient at the 5% level of significance
(6 marks)
d)
Find the expected monthly salary of a new employee of this company with the
following characteristics:

i)
Gender = Female ; Specialization = Marketing

(2 marks)

ii)
Gender = Male ; Specialization = Economics

(2 marks)

e)
Explain the concept of Dummy – Variance Trap

Question Two (20 marks)
Study the following Logit Model that captures the probability of a person being employed in
the civil service as a function of their Age and Years of experience
? Pi ?
Log?
? ? 068
.
2
? 745
.
1
Age ? 832
.
0
Expereince
?1? Pi ?

Lu ?
?
5
.
36

a)
Interpret the results of the Model both in terms of Logit coefficients and marginal
effects

(6 marks)

Page 2 of 4

b)
Given that the Log-likelihood value of the restricted model (LR) is - 42.5; calculate:

i)
Pseudo - R2 and interpret the results
ii)
Likelihood ratio statistics and test for the validity of these restriction at the 5%
level of significance

(4 marks)

c)
Given that for a typical individual, age is 30 years with 10 years of experience, what
is the odds in favour of employment in the civil services. Calculate the probability of
employment in the civil service.

(4 marks)

d)
Explain the characteristics of the Linear Probability Model.

(6 marks)

Question Three (20 marks)
Consider the following simple Keynesian Model of income determination:

Consumption function:
Ct = ao + q1Yt + a2 Ct-1+u1
Investment function:
It = bo + b1 Y t - 1 + b2 Yt + u2

Income Identity

Yt = Ct + I t + G t
Where Gt is the level of government expenditure, and Yt - 1 and C t - 1 are lagged income and
consumption respectively

a)
Identify the endogenous and exogenous variables

(2 marks)
b)
Examine the identifications status of the consumption function using both order
and rank conditions

(6 marks)
c)
Why is identification of equations important?

(2 marks)
d)
Derive the reduced-from equations form the structural equations above using
matrix approach, and show that they measure both direct and indirect effects
(10 marks)

Page 3 of 4

Question Four (20 marks)
a)
Distinguish between a stationary and a Non-Stationary series in time series
econometrics

(4 marks)

b)
Explain the meaning of an integrated series, and state the 4 properties of an integrated
series.

(6 marks)

c)
Describe the procedure for testing for unit root by augmented Dickey-fuller method.

(5 marks)
d)
A model of the three-month treasury bill Rates for Kenya is given as follows:
Y
? ? 386
.
0
? 0899
.
0
Y
n ? 50
2
R ? 048
.
0

t
t ?1

.
s e
(
)
231
.
0
(
)
104
.
0

Test for the presence of a unit root in the above model.

(5 marks)

Question Five (20 marks)
Compare and contrast between the following terms as applied in econometrics
i)
Balanced panel and Unbalance panel

(4 marks)
ii)
Cointegration and Error correction model

(4 marks)
iii)
Fixed effects regression and Random effects regressions

(4 marks)
iv)
Autoregressive process and Moving average process

(4 marks)
v)
Within groups and First difference fixed effects

(4 marks)

Page 4 of 4

Ees401: Fundamentals Of Econometrics Question Paper

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