Estimating the volume of loans that will be made at a credit union is crucial to effective cash management in those institutions. In the table that follows are quarterly data for a real credit union located in a midwestern city. Credit unions are financial institutions similar to banks, but credit unions are not-for-profit firms whose members are the actual owners (remember their slogan, "It's where you belong"). The members may be both depositors in and borrowers from the credit union.

a. Estimate a multiple-regression model to estimate loan demand and calculate its root-man-squared error.

b. Estimate a time-scries decomposition model to estimate loan demand with the same data and calculate its root-mcan-squared error.

c. Combine the models in parts (a) and (b) and determine whether the combined model performs better than either or both of the original models. Try to explain why you obtained the results you did.

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Quarter Loan Volume Assets Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 6,387,000 6,435,750 6,482,780 6,683,800 7,094,210 7,329,770 17,846,800 19,435,600 19,714,100 21,185,800 22,716,700 23,790,500 Members 5,164 5,210 5,255 5,289 5,391 5,461 Prime Rate 9.5 9.5 9.1 8.5 7.5 7.5