Let inven, be the real value inventories in the United States during year t, let GDP, denote

Question:

Let inven, be the real value inventories in the United States during year t, let GDP, denote real gross domestic product, and let r3t denote the (ex post) real interest rate on three-month T-bills. The ex post real interest rate is (approximately) r3t = i3, - inft where i3t is the rate on three-month T-bills and inft is the annual inflation rate. The change in inventories, (invent, is the inventory investment for the year. The accelerator model of inventory investment is
(inven, = (0 + (1 GDPt + ut,
Where (1 > 0.
(i) Use the data in INVEN.RAW to estimate the accelerator model. Report the results in the usual form and interpret the equation. Is 1, statistically greater than zero?
(ii) If the real interest rate rises, then the of holding inventories rises, and so an increase in the real interest rate should decrease inventories. Add the real interest rate to the accelerator model and discuss the results.
(iii) Does the level of the real interest rate work better than the first difference, (r3t? Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...