6. Econometrics deals with the measurement of economic relationships which are stochastic or random. The simplest form of economic relationships between two variables X and Y can be represented by: = Y,- Be + B,X, +U, ; where Bo and B₁ = are regression parameters and U₁ = the stochastic disturbance term. What are the reasons for the insertion of U-term in the model? 7. The following data refers to the demand for money (M) and the rate of interest (R) for eight different economies: M (In billions) 56 35 50 46 30 4.6 5.1 7.3 20 8.9 5.3 6.3 Assuming a relationship M = a + BR+U,, obtain the OLS estimators of a and B b. Calculate the coefficient of determination for the data and interpret its value C. If in a 9th economy the rate of interest is R=8.1, predict the demand for money(M) in this economy. 8. The following data refers to the price of a good 'P' and the quantity of the good supplied, 'S'. P 2 5 4 8 2 S 32 28 43 17 15 Estimate the linear regression line E(S) =a + BP b. Estimate the standard errors of a and 7 41 1 9 61 37 6.7 3.5 8 40 ^
