The consumption function is one of the key relationships in economics; where consumption y depends on disposable income x. consider the quarterly data for these seasonally adjusted variables, measured in billions of dollars. A portion of the data is shown in the accompanying table.
Date Consumption ($ billions) Disposable Income ($ billions)
2006:01....................9148.2...............................9705.2
2006:02....................9266.6...............................9863.8
⋮....................................⋮.......................................⋮
2010:04..................10525.2..............................11514.7
a. Estimate Consumption = β0 + β1Disposable Income + ε. Plot the residuals against time to determine if there is a possibility of correlated observations.
b. Discuss the consequences of correlated observations and suggest a possible remedy.