In August 2010, the Department of Commerce reported that economic weakness persists across the country with consumer spending continuing to stagnate. The government is considering various tax benefits to stimulate consumer spending through increased disposable income. The consumption function is one of the key relationships in economics; where consumption y depends on disposable income x. consider the quarterly data for these seasonally adjusted variables, measured in billions of dollars. A portion of the data is shown in the accompanying table; the entire data set, labeled Consumptfon_Quarterly, can be found on the text website.

a. Estimate Consumption = β0 + β1Disposable Income + . Plot the residuals against time to determine if there is a possibility of correlated observations.
b. Discuss the consequences of correlated observations and suggest a possibleremedy.

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Consumption Disposable Income Date 2006:01 2006:02 (S billions) 9148.2 9266.6 ($ billions) 9705.2 9863.8 2010:04 10525.2 11514.7