To study the relationship between capacity utilization in manufacturing and inflation in the United States, we obtained the data shown in Table 3-5 (found on the textbook's Web site). In this table, Y = inflation rate as measured by the percentage change in GDP implicit price deflator and X = capacity utilization rate in manufacturing as measured by output as a percent of capacity for the years 1960-2007.
a. A priori, what would you expect to be the relationship between inflation rate and capacity utilization rate? What is the economic rationale behind your expectation?
b. Regress Y on X and present your result in the format of Eq. (3.46).
c. Is the estimated slope coefficient statistically significant?
d. Is it statistically different from unity?
e. The natural rate of capacity utilization is defined as the rate at which V is zero. What is this rate for the period under study?