If the Regression Results for a Linear Probability Model of Mortgage

question 27

Multiple Choice

If the regression results for a linear probability model of mortgage application are given by: Approved_i = 0.6(0.12) + -0.05(0.001) Debt2IncomeRatio_i, with standard errors reported in parenthesis. How should we interpret the coefficient on the debt-to-income ratio variable?

• A) Increasing your debt to income ratio by 1 decreases your probability of being approved by 0.05.
• B) Increasing your debt to income ratio by 1 decreases your probability of being approved by 0.55.
• C) The probability of being approved for a mortgage is 0.05.
• D) The probability of being approved for a mortgage is 0.6.

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Definitions:

Linear Term

A component of an equation characterized by a variable raised to the first power, indicating a direct proportionality relationship.

Significance Level

The possibility of inaccurately negating the null hypothesis in a statistical test, often exemplified by alpha.

Second-order Model

In statistics and mathematics, a model that accounts for variability by including terms for both the linear effects and their squares.

Significance Level

A threshold in hypothesis testing that determines whether an observed effect is statistically significant. It is the probability of rejecting the null hypothesis when it is true.