Answer Happy

To examine the quantity theory of money, Brumm (2005)2 specifies the inflation equation inflat = Bo + Bimoney + Bzoutput + u, (1) where inflat 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 B1 = 1 and B2 = -1. Four instrumental variables are proposed for the endogenous variable of output, initial = initial level of real GDP, school = a measure of the population's educational attainment, inv = average investment share of GDP, and poprate = average population growth rate. The dataset brumm.csv consists of 1995 data on 76 countries. Research Questions 1. (5 points) Obtain OLS estimates of the inflation equation (1) and report regression results (3 points).3 Test the economic theory using the OLS estimates (2 points). Hint: Use the lm () function. 2. (4 points) Give an intuitive explanation as to why output can be endogenous 3. (8 points) Explain why the proposed instrumental variables (IV) can be valid