Step 1: When inflation is high, lenders require higher interest rates to make up

Question

Step 1:
When inflation is high, lenders require higher interest rates to make up for the loss of purchasing power of their money while it is loaned out. Table 10.1 displays the return (almost entirely interest rate) of one-year Treasury bills and the rate of inflation as measured by the change in the government's Consumer Price Index in the same year. An inflation rate of 5% means that the same set of goods and services costs 5% more. The data cover 55 years, from 1958 to 2013. Figure 10.9 is a scatterplot of these data. Figure 10.10 shows Excel regression output for predicting T-bill return from inflation rate.

Step 2:
What is the equation of the least-squares regression line for predicting T-bill return? Give your answer to 3 decimal places.

Y-Intercept:
Slope:

Step 1:
When inflation is high, lenders require higher interest rates to make up for the loss of purchasing power of their money while it is loaned out. Table 10.1 displays the return (almost entirely interest rate) of one-year Treasury bills and the rate of inflation as measured by the change in the government's Consumer Price Index in the same year. An inflation rate of 5% means that the same set of goods and services costs 5% more. The data cover 55 years, from 1958 to 2013. Figure 10.9 is a scatterplot of these data. Figure 10.10 shows Excel regression output for predicting T-bill return from inflation rate.

Excel Text

Choose the most accurate description of the form, direction, and strength of the relationship between the inflation rate and the return on Treasury bills:

The scatterplot shows a linear negative relationship. The scatterplot shows a moderately strong, positive linear relationship. The scatterplot shows a very strong linear negative relationship. The scatterplot shows a very strong linear positive relationship.

Step 2:
What is the equation of the least-squares regression line for predicting T-bill return? Give your answer to 3 decimal places.

Y-Intercept:
Slope:

Explanation / Answer

Part 1

We see that T-bill return linearly increases with Rate of inflation with high positive slope. So,
The scatterplot shows a very strong, linear positive relationship.

Part 2

The equation of the least-squares regression line for predicting T-bill return is
T-bill = 2.302 + 0.703 INFLATION

Y-Intercept = 2.302
Slope = 0.703

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