Applied Seminar in Economics Total Marks 50

(Final Exam) (M.Sc. 4th semester)

Attempt all questions (carry equal marks) Max. Time: 3.00 hours
(6+4)
Q#01 what is autocorrelation? Explain the causes & consequences of autocorrelation and how it can be
resolved when  (rho) is unknown.

Q#02 Write short notes on the following tests: (3+4+3)

i) Ramsey’s RESET test for omitted variables;
ii) Breusch-Godfrey LM test for autocorrelation;
iii) White test for Heteroscedasticity.
Q#03a) State and explain the properties of both white-noise & Stationary processes. (4+6)
b) Consider the following model:

Yt  Yt 1  et
Where et ~iid (0, σ2).
i) Show that the model is non-stationary.
ii) Show that the model is integrated of order one, I(1).
iii) What is the name of process?

Q#04a) Explain the meaning of cointegration. Explain step by step how you would test for cointegration using
the Engle-Granger approach.
b) Differentiate between deterministic trend and stochastic trend? (6+4)

Q#05 Consider the following first order bivariate structural VAR model:

y t  b10  b12 z t   11 y t 1   12 z t 1   yt
(4+4+2)
z t  b20  b21 y t   21 y t 1   22 z t 1   zt
Where it is assumed that both y t & z t are stationary. It is also assumed that  yt &  zt are white
noise disturbances,
i) Obtain reduced form VAR from above system.
ii) Retrieve, if possible, the structural VAR parameters from reduced form parameters using choleski
decomposition.
iii) How can you apply the Granger causality test in the equations of both y t & z t .

…………………………………………Best of luck……………………………………………..