The Australian dollar is regarded as a commodity currency. Assuming that demand for iron ore is not affected by changes in commodity prices, this implies that an increase in the commodity price drives the external value of the Australian dollar. Panel1 Ais a plot of the commodity price index (CP) that captures the iron ore price. Panel1 Bis a plot of the external value of AUD expressed in terms of the Chinese Yuan (EXRATE) for the period Feb 2010 to Aug 2021.  

  

160 140 120 100 80 60 Panel 1A 40 10 11 12 13 14 15 16 17 18 19 20 21 Panel 1C (LEXRATE) Exogenous: Constant, Linear Trend Lag Length: 0 (Automatic - based on SIC, maxlag=13) 1-Statistic Prob. (a) Briefly explain the movement of the CP and EXRATE. [2] Augmented Dickey-Fuller test statistic Test critical values: 75 1% level 5% level 10% level 7.0 65 60 (c) Write down the unit root test regression specification. [2] 55 (b) Panel 1C and 1D show the Augmented Dickey-Fuller (ADF) test results for the log(exrate) (i.e.. LEXRATE) and the log(CP) (i.e., LCP). Why is the ADF test preferred to the DF test? [2] -2.422430 0.3664 -4.025924 -3.442712 -3.146022 5.0 45 40 10 Panel 1B 11 12 13 14 15 16 17 18 19 20 21 Panel 1D (LCP) Exogenous: Constant, Linear Trend Lag Length: 1 (Automatic-based on SIC, maxlag-13) 1-Statistic Prob. Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level -1.613724 0.7827 -4.026429 -3.442955 -3.146165