ECONOMETRICS

QUESTION A1 (15 marks) (a) It is generally assumed that the stochastic error terms (51-) are normally distributed. Briey explain why :51- is added to a regression equation and why the assumption of a normal distribution is a reasonable assumption? (5) (b) Comment on the following statement: In the linear regression model the explanatory variable is the cause and the dependent variable is the effect. (3) (0) Explain the meaning of linear in the variables and linear in the coefcients. (3) (d) What is the meaning of the total, explained and residual sum of squares? (4)