Question: Regression equations are sometimes estimated using an explanatory variable that is a deviation from some value of interest. An example is a capacity utilization rate

Regression equations are sometimes estimated using an explanatory variable that is a deviation from some value of interest. An example is a capacity utilization rate–

unemployment rate equation, such as:

ut = a0 + a1(CAPt − CAPf t ) + et where CAP f t is a single value representing the capacity utilization rate corresponding to full employment (the value of 87.5% is sometimes used for this purpose).

(a) Will the estimated intercept for this equation differ from that for the equation with only CAPt as an explanatory variable? Explain.

(b) Will the estimated slope coefficient for this equation differ from that for the equation with only CAPt as an explanatory variable? Explain.

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