Question: Comment on the following: In a study on the demand for money, an econ- omist regressed real cash balances on permanent income. To test whether

Comment on the following: In a study on the demand for money, an econ- omist regressed real cash balances on permanent income. To test whether the interest rate has been omitted, she regressed the residual from this regression on the interest rate and found that the coefficient was not signif- icantly different from zero. She therefore concluded that the interest rate does not belong in the demand for money function.

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