Examine the Quantity Theory of Money - Economics Assignment Help

Assignment Task:

Task:

Problem 1: money, Growth, and Inflation (30 marks)

Background 'lb examine the quantity theory of money, Brumm (2005) ('Money Growth, Output Growth, and Inflation: A Reexamination of the Modern Quantity Theory's Linchpin Prediction,' Southern Economic Journal, 71(3), 661 6671 specifics the inflation equation 
inflat 01 + &money + $3output is 
where int lat is the growth rate of the general price level, money is the growth rate of the money supply, and output is the growth rate of national output. Economic theory suggests that 33 = I and /33 = —1. The dataset brus.dta consists of 1995 data on 76 countries. 
Research tasks 
1. It is argued that output may be endogenous. Four instrumental variables are proposed, initial = initial level of real GDP, school = a measure of the population's educational attainment, inn = average investment share of GDP, and poprate = average population growth rate. (a) Give an intuitive explanation as to why output can be endogenous (3 marks) (

b) Explain why the proposed Ns can be valid. (6 marks, i.e., 2 marks for understanding of valid IVs and I mark for convincing story for each IV) 
2. Using the four IVs, obtain TSLS estimates of the inflation equation (4 marks), and test the economic theory using the IV estimates (4 marks). 3. Determine whether the IVs are strong or not (3 marks) and test if they are exogenous (3 marks).

4. Present a short research note (less than a half page) of your findings. You are allowed to use your previous findings here again or to estimate again the model using a different set of IVs (7 marks). 
 

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