1. You MUST have the “use” command in the do-file which calls the data in Stata from wherever you have stored it on your computer. Along with this have the “clear all, “log using”, “log close” and “save command for your data set” in your do file. You may also want to use the describe command to understand the variable definitions. (6 points)
2. Linear Probability Model with Multiple x variables (38 points):
a) Create a dummy variable called “low_vote” where low_vote = 1 if vote < 50 and 0, otherwise. Make sure you do the tab command to check whether the variable has been created correctly. Then, regress low_vote on growth, inflation, and person. Find summary statistics for all 4 variables. All commands must be in the do-file and attach Stata output. You don’t need to attach output from the tab command. (8 points)
b) Write the population regression model and it’s expected value for the above regression model. (4 points)
c) Interpret the coefficients of inflation, person, and intercept. Pay careful attention to units when interpreting. Does b1 make sense? Explain. (10 points)
d) What is predicted y when growth, inflation and person are fixed at their mean values? You can do this by hand. Do not round. Does this match up with mean low_vote in 2(a)? (8 points)
e) Find the predicted y when inflation is 2.497%, growth rate is 11.765%, and incumbent is running for re-election. Do not round while calculating. Interpret. Is there any problem and if yes, what? (8 points)
3. Multiple regression model with slope and intercept dummy (56 points):
a) Use Stata to do the following. All commands must be in the do-file and attach Stata output. (12 points)
• Generate an interaction between person and growth rate of GDP in the first 3 quarters of the election year (person_growth)
• Create a dummy variable called y_2004, which is 1 if election year is 2004 and 0, otherwise
• Create a dummy variable called y_2000, which is 1 if election year is 2000 and 0, otherwise.
• Regress vote on person, growth, person_growth, inflation, y_2000, y_2004
b) What values can this interaction term take? (5 points)
c) What is the intuition behind introducing this interaction term? (5 points)
d) Calculate by hand the marginal effect of growth on incumbent party vote share when the incumbent is running and not running for re-election. Interpret both marginal effects. (10 points)
e) Calculate by hand the effect of person on incumbent party vote share. Explain your findings and pay close attention to the base category. (6 points)
f) Draw a rough graph to show the relationship between vote and growth. You can ignore inflation, y_2000 and y_2004 when you draw the graph. Make sure to mark intercepts when incumbent is running and not running for re-election. Hence, have two lines – one for incumbent running and the other for incumbent not running. (7 points)
g) Interpret y_2000 and y_2004 coefficients. Pay careful attention to the base category when interpreting. (4 points)
h) Can we create an interaction term between y_2000 and y_2004 and include this in the regression model above? Explain. There’s no need to use Stata for this question. (7 points)
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