Using the macroeconomic data in Appendix Table F5.1, estimate by least squares the parameters of the model ct = β0 + β1yt + β2ct−1 + β3ct−2 + εt, where ct is the log of real consumption and yt is the log of real disposable income.

a. Use the Breusch and Pagan test to examine the residuals for autocorrelation.

b. Is the estimated equation stable? What is the characteristic equation for the autoregressive part of this model? What are the roots of the characteristic equation, using your estimated parameters?

c. What is your implied estimate of the short-run (impact) multiplier for change in yt on ct? Compute the estimated long-run multiplier.