Regression models that describe macroeconomic properties in the United States often have to deal with large amounts of collinearity. For
(a) This plot shows timeplots of the two series. Do you think that they are correlated? Estimate the correlation.
(b) If the variables are expressed on a log scale, will the transformation to logs increase, de-crease, or not affect the correlation between these series?
(c) If both variables are used as explanatory variables in a multiple regression, will you be able to separate the two?
(d) Youre trying to build a model to predict how changes in the macro economy will affect consumer demand. Youve got sales of your firm over time as the response. Suggest an approach to using the information in both of these series in a multiple regression that avoids some of the effects of collinearity.
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