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 r

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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)

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