Question 1The data file cons.dtacontains quarterly data on the log of real personal disposable income (Y) and the log of real personal consumption expenditure (C) for the US economy over the period 1960:1 to 2009:4.a.For each series, decide whether it has a unit root or not. Use aformal test. b.Regardless of the result in part a, assume now that both series have unit roots. Estimate the simple consumption function (log consumption is a function of log income). What is the implication of non-stationarity ofthe series for the results of the regression?

c.Now estimate a DL version of the function,i.e.with lags of income. Use OLS and HAC corrected standard errors.

d.Explain in words what are the economic implications of the coefficients.

e.Calculate the long run marginal effectoflogincome onlog consumption.Test the hypothesis that this is equal 1.

f.In your opinion, does the model meet the requirementsof the DL model in term of the exogeneity of the regressors?Justify your answer.

Question 2The file “rugby etc.dta”contains data on average tries per game in 6 nations rugby and the level of the NASDAQ stock market. Runa regression of tries on the NASDAQ and explain why 6 nations tries appears to cause the NASDAQ to move up!Explain how you wouldfix this problemand estimate abetter model of the relationship