From the data for the period 1971€“I to 1988€“IV for Canada, the following regression results were obtained:

1.

2.

3.

where M1 = M1 money supply, GDP = gross domestic product, both measured in billions of Canadian dollars, ln is natural log, and ˆut represent the estimated residuals from regression (1).

a. Interpret regressions (1) and (2).

b. Do you suspect that regression (1) is spurious? Why?

c. Is regression (2) spurious? How do you know?

d. From the results of regression (3), would you change your conclusion in (b)? Why?

e. Now consider the following regression:

What does this regression tell you? Does this help you decide if regression (1) is spurious or not?

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În MI, = -10.2571 t = (-12,9422) + 1.5975 In GDP; (25.8865) R² = 0.9463 d = 0.3254 Aln M1, = 0.0095 +0.5833A In GDP; t = (2.4957) (1.8958) R2 = 0.0885 d = 1.7399