Question 2 (20 marks)
High and rising inflation has forced governments to increase interest rates. These increases are contractionary policies. You collected data based on theory and estimated the following model below:
log GDP =6.2-0.4r-0.02\pi -0.04UE
(.012)(.643)(.981)
n=40,R^(2)=0.81
where, GDP is Gross Domestic Product,
\pi
is the inflation rate, r is the interest rate, UE is the unemployment rate, standard errors are in parentheses.
a) Interpret each of the regression above. Are the signs what
u
expect based
on theory?
(6 marks)
b) All other factors being equal, test the hypothesis that a change in interest rate cause a
0.5%
decline in GDP, what do you conclude?
(7 marks)
c) All other factors being equal, test the hypothesis that an increase in the unemployment reduces GDP by
.05%
?
(7 marks)
(Total 20
Marks)