Suppose There Is Significant Correlation Between Two Variables

question 41

Essay

Suppose there is significant correlation between two variables. Describe two cases under which it might be inappropriate to use the linear regression equation for prediction. Give
examples to support these cases.

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Definitions:

Wealth Effect

The change in spending and consumption patterns caused by changes in perceived wealth.

Recessions

are described as periods of temporary economic decline during which trade and industrial activities are reduced, generally identified by a fall in GDP in successive quarters.

Saving Exceeded Investment

A situation where the amount of savings in an economy surpasses the level of investment spending.

Long-Run Aggregate Supply

A concept in economics that represents the total quantity of goods and services that can be produced in an economy at a given overall price level and in a given time period, assuming all resources are fully employed.