Homework 

3 
(Due Sunday, Jan 2nd , 2022 before 11:59 pm. No Late submission will be
accepted.)

Note:
1) In order to show that this is your original work, please show details of your
proofs or calculations.
2) You can submit a word file or pdf file in the system as your solutions. You can
also handwrite your solutions and scan it to a pdf file. If you prefer taking
pictures of your handwriting, please paste your pictures in a word file.
3) Results without showing your work or without proper explanations will only get
half credits.

1. In your textbook Example 6.8, SAT scores.

(1) Explain in detail, what does β , β and δ measure respectively? (for example, in our
drug test example that we used in class, the coefficient in front of the treated group
dummy variable measures how the treated group patients’ health conditions (before and
after) are different from the controlled group patients’ health conditions (before and
after)). (1.5 points)

(Hint: be careful when you are explaining β and δ, point out the differences between
those two.)
Solution:

β measures how the 2nd times’ test scores are different from the 1st time scores;

β measures how the scores of the group of students who took the prep, are different
from the scores of the group of students who didn’t take the prep;

δ measures how the prep improves the scores of students

(2) Suppose I want to add a country fixed effect in the model specified in the book ((6-3)
in the picture), and we have US, Canadian, and Swiss students in the sample. (1 point)

Then (i) explain the structure of country FEs (Hint: to start with, you should describe
how many new dummy variables are added due to country FEs.)

(ii) Explain what country fixed effects control for (for example, individual (or personal)
fixed effects control for characteristics that doesn’t change over time for the same
individual but contributes to our outcome variable.)

Solution: You would have two new dummy variables. For example, you can build a
dummy for being a US student or now, another one for being a Canadian student or not.
Or you can name any two of the three countries. (0.5 point)

Ii. The country fixed effects here control for the country level characteristics that
contributes to a student’s SAT scores. For example, the education system for US
students could prepare them better for the SAT tests if the US system has designed
courses corresponding to the SAT subjects. (0.5 point)

2. In our Week 11’s sample paper, (under the folder of Week 11, with the name of
“Sample Paper”).

(1) Point out the (key) instrumental variable they used for Family CEO. (0.5 point)

Solution: The gender of first-born child

(2) Explain how this instrumental variable matches the two conditions for using
instrumental variables: Relevant and Exogenous conditions. (1 point)
(Hint: I posted part of our in-class slides as below.) You are supposed to talk about how
the expectation of “B” in the sample paper varies with the “L” in our paper, and how the
“ε” in the sample is uncorrelated with the “L” in our paper.

Answer Guidelines:

The essence is that you should provide 1) the equation of relevant condition and
exogenous condition, and also what is B, and L in the paper; 2) explain clearly how the
two conditions are fulfilled in the setting of the paper.

 
3. (4 points)          AR(p): (1+∅ 𝐿 ∅ 𝐿 +…+∅ 𝐿 ) 𝑥 =𝜀  

MA(q): 𝑥 =(1+𝜃 𝐿 𝜃 𝐿 +…+𝜃 𝐿 )𝜀

          where {𝜀 } is a white noise process and {𝑥 } is a time series, a sequence of 
realizations of the white noise process {𝜀 }. 
Prove that AR(2) model can be inverted to MA(∞). (Use the lag operator L, and 
assume the conditions necessary for inversion are all fulfilled) 
Hint: Use the Taylor expansion for equation 
        1 𝑧 =1+z+𝑧 +𝑧 +… for |z| 1 
Solutions: 
(1) (1 point)
(1+∅ 𝐿 ∅ 𝐿 𝑥 =𝜀

We can find 𝜆 and 𝜆 such that

1+∅ 𝐿 ∅ 𝐿 1 𝜆 𝐿 1 𝜆 𝐿 ,
 Where 𝜆 𝜆 =∅ , 𝜆 𝜆 =∅

(2) (1 point)
(Then (1+∅ 𝐿 ∅ 𝐿 𝑥 =𝜀 , can be written as
𝑥 1 𝜆 𝐿 1 𝜆 𝐿 𝜀
(3) (1 point)
According to the hint,
We have  

𝑥 𝜆 𝐿 𝜆 𝐿 𝜀

(4) (1 point)
Moving out the polynomials give us

𝜆 𝐿 𝜆 𝐿

=(1 𝜆 𝐿 𝜆 𝐿 +…)(1 𝜆 𝐿 𝜆 𝐿 +…)

=1+(𝜆 𝐿 𝜆 𝐿)+( 𝜆 𝜆 𝜆 𝜆 )𝐿 +…

= 𝜆 𝜆 𝐿

Note: Other ways make sense as well. Pay extra attention to make sure
they make sense