Damodar Gujarati^12 estimated the following two money supply equations on U.S. a
ID: 3234779 • Letter: D
Question
Damodar Gujarati^12 estimated the following two money supply equations on U.S. annual data. The first was estimated with OLS, and the second was estimated with 2SLS (with Investment and Government Expenditure as predetermined variables in the reduced form equation). where M2_t = the M2 money stock in year t, in billions of dollars GDP_t = Gross Domestic Product in year t, in billions of dollars a. What, exactly, does the caret (hat) over GDP in the 2SLS equation mean? b. Which equation makes more sense on theoretical grounds? Explain. c. Which equation is more likely to have biased coefficients? Explain. d. If you had to choose one equation, which would you prefer? Why? e. If your friend claims that "it doesn't matter which equation you use because they're virtually identical, " how would you respond?Explanation / Answer
a ) It's an estimator of Gross Domestic Product in year t, in billions of dollars, to be an estimator means that the GDPt is unknow, and is necesary to use an estimator for calculate the equation.
b) 2SLS, contemplates estimators, which means that the information you have is enough to make an asumption and work with te results.
c) OLS is a method based on coefficients to measure various risk factors (independent variable) for a dependent variable return.
d) Most investors used to choose a different method than OLS, because, is limited and not efficient evaluating a certain type of distributions like two tails for example, the investors, are concerned in evaluate the tailed distributions, because is easier to detect variation probabilities.
e) Both equations aren´t identical, each one have defined purpose, one (OLS) mainly based on means values of the covariates, so it´s surd of restricted; the second one (2SLS) estimates GDP values, the investors are worried about presicion, to use an estimator get close to reality and let them make best invertion options.
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