Refer to Exercise 7.24 and the data in the following table concerning four economic variables in the

Question:

Refer to Exercise 7.24 and the data in the following table concerning four economic variables in the U.S. from 1947€“2000.

Yd Wealth Year Interest Rate 1947 976.4 1035.2 5166.8 -10.351 5280.8 1948 998.1 1090.0 -4.720 1095.6 1949 1025.3 5607.4 Year Yd Wealth Interest Rate 1977 2992.1 3360.7 13786.3 -1.190 1978 3124.7 3527.5 14450.5 0.113 1979 3203.2 3628.6 15340

a. Based on the regression of consumption expenditure on real income, real wealth and real interest rate, find out which of the regression coefficients are individually statistically significant at the 5 percent level of significance. Are the signs of the estimated coefficients in accord with economic theory?

b. Based on the results in (a), how would you estimate the income, wealth, and interest rate elasticities? What additional information, if any, do you need to compute the elasticities?

c. How would you test the hypothesis that the income and wealth elasticities are the same? Show the necessary calculations.

d. Suppose instead of the linear consumption function estimated in (a), you regress the logarithm of consumption expenditure on the logarithms of income and wealth and the interest rate. Show the regression results. How would you interpret the results?

e. What are the income and wealth elasticities estimated in (d)? How would you interpret the coefficient of the interest rate estimated in (d)?

f. In the regression in (d) could you have used the logarithm of the interest rate instead of the interest rate? Why or why not?

g. How would you compare the elasticities estimated in (b) and in (d)?

h. Between the regression models estimated in (a) and (d ), which would you prefer? Why?

i. Suppose instead of estimating the model given in (d ), you only regress the logarithm of consumption expenditure on the logarithm of income. How would you decide if it is worth adding the logarithm of wealth in the model? And how would you decide if it is worth adding both the logarithm of wealth and interest rate variables in the model? Show the necessary calculations.