The McGraw-Hill Series Economics essentials of economics brue, McConnell, and Flynn Essentials of Economics

Questions
12.1. State whether the following statements are true or false. Briefly justify your answer.
a.
When autocorrelation is present, OLS estimators are biased as well as
inefficient.
b.
The Durbin–Watson 
d
test assumes that the variance of the error term 
u
t
is
homoscedastic.
c.
The first-difference transformation to eliminate autocorrelation assumes that the
coefficient of autocorrelation 
ρ
is 
−
1.
d.
The 
R
2
values of two models, one involving regression in the first-difference
form and another in the level form, are not directly comparable.
e.
A significant Durbin–Watson 
d
does not necessarily mean there is autocorrela-
tion of the first order.
f.
In the presence of autocorrelation, the conventionally computed variances and
standard errors of forecast values are inefficient.
g.
The exclusion of an important variable(s) from a regression model may give a
significant 
d
value.
h.
In the AR(1) scheme, a test of the hypothesis that
ρ
=
1 can be made by the
Berenblutt–Webb
g
statistic as well as the Durbin–Watson
d
statistic.
i.
In the regression of the first difference of 
Y
on the first differences of 
X
, if there
is a constant term and a linear trend term, it means in the original model there is
a linear as well as a quadratic trend term.
12.2. Given a sample of 50 observations and 4 explanatory variables, what can you say
about autocorrelation if (
a
) 
d
=
1
.
05? (
b
) 
d
=
1
.
40? (
c
) 
d
=
2
.
50? (
d
) 
d
=
3
.
97?
12.3. In studying the movement in the production workers’ share in the value added (i.e.,
labor’s share), the following models were considered by Gujarati:*
Model A:
Y
t
=
β
0
+
β
1
t
+
u
t
Model B:
Y
t
=
α
0
+
α
1
t
+
α
2
t
2
+
u
t
EXERCISES
*
Damodar Gujarati, “Labor’s Share in Manufacturing Industries,’’ 
Industrial and Labor Relations Review,
vol. 23, no. 1, October 1969, pp. 65–75.
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