Instructions:

• This exam is open-book. You may use any books, class notes, etc. that you find helpful. However, you may not communicate with anyone other than the instructor about the exam.
• The exam is due by 1pm on Monday, May 7. Submit your exam in Word or pdf format as an email attachment. Be sure to explain and justify your methods fully. Include properly identified and referenced Stata outputs either in your text or in an appendix.
• This exam is not intended to be extremely time-consuming or difficult. However, use some care in deciding which econometric techniques to use. There is more than one way to do each of the problems, but some methods may be more appropriate than others. All of the procedures required should be readily available in Stata 9.
• Have a wonderful summer! (This part is not due on May 7!)

1. The data set phillips.dta contains data on the U.S. unemployment rate, the inflation rate, the expected inflation rate, and the share of the labor force that is female. The modern theory of the Phillips curve asserts that the unemployment rate should be temporarily below the natural rate when inflation is higher than expected, but that expected changes in inflation should not affect unemployment.

• Use an appropriate distributed-lag regression model to estimate and test the effect of unexpected inflation on unemployment. Calculate an appropriate number of dynamic and cumulative dynamic multipliers.
• Test whether expected inflation also affects unemployment. Is the theory supported?
• Test whether the long-run effect of unexpected inflation on unemployment is zero, as predicted by the theory.

2. With the same data set, use a three-variable VAR with appropriate lag length to explore the relationship between unemployment, inflation, and expected inflation. Express your results as impulse-response functions for each of the three variables in response to each kind of shock. Discuss your "ordering" (identification) assumptions and whether the results are sensitive to changes. Discuss the following estimated dynamic effects in relation to the predictions of theory:

• effects of actual inflation shocks on future actual and expected inflation
• effects of actual inflation shocks on unemployment in the short and long run
• effects of unemployment shocks on expected inflation.

3. The data set fish.dta contains data on daily sales at New York's Fulton Fish Market. You are to use this data set to estimate the demand curve for fish. Write up a summary of your findings, including a justification of your specification and estimation methods and the implied assumptions you are making. Test these assumptions when possible.