To investigate the relationship between federal budget deficits and interest rat

Question

To investigate the relationship between federal budget deficits and interest rates, the following equation was estimated by least squares, using quarterly data for the period 1970-1983:

Y = 0.103 - 0.079X , SER = 0.523, R2 = .00

(0.092) (0.079)

( ): standard deviations.

where: Y = interest rate on Aaa bonds (average value about 10%)

X = the federal deficit as a percent of gross national product (average value about 3%)

a. Give a 95% confidence interval for the effect of X on Y.

b.   Is the estimated effect of X of Y statistically significant at the 5% level?

c. Is this estimated effect substantial?

d.   It is widely believed that an increase in the federal deficit increases interest rates.

Do these results disprove that belief?

e. What does SER measure?

f. What does R2 measure?

Explanation / Answer

a. Here the regression coefficient B1= -0.079

Standard error of regression coefficient SE(B1) = 0.079

Here n = 14

so dF (error) = 12

95% confidence interval for regression coefficient = B1 +- tdF,0.05 SE(B1)

= - 0.079 + 2.1788 * 0.079

= (-0.251, 0.093)

b. Test statistic

t = - 0.079/0.079 = -1

so here at alpha = 0.05 , tcritical = 2.1788

so, l t l < tcritical so we will fail to reject the null hypothesis and can say that the effect is not significant or substantial.

(c) No, the effect is not substantial.

d. Yes, the result negates the widely dispersed believe that an increase in the federal deficit increases interest rates.

e. HereSER meansure the standard error of residual or the standard deviation of prdicted valeus and the actual values.

f. Here R2 measure the percentage or proportion variability in interest rate on Aaa bonds explained by variabity in the federal deficit as a percent of gross national product

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.