Having Learned in Macroeconomics That Consumption Depends on Disposable Income

question 29

Essay

Having learned in macroeconomics that consumption depends on disposable income, you
want to determine whether or not disposable income helps predict future consumption.
You collect data for the sample period 1962:I to 1995:IV and plot the two variables.
(a)To determine whether or not past values of personal disposable income growth rates help
to predict consumption growth rates, you estimate the following relationship. The Granger causality test for the exclusion on all four lags of the GDP growth rate is
0.98.Find the critical value for the 1%, the 5%, and the 10% level from the relevant table
and make a decision on whether or not these additional variables Granger cause the
change in the growth rate of consumption.

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Definitions:

Marginal Utility

The boost in satisfaction or usefulness experienced from consuming another unit of a product or service.

Utility Maximizing

The principle that individuals or firms seek to achieve the highest level of satisfaction or benefit from their choices with the resources available.

Utility Maximizes

Refers to the economic principle that individuals or firms seek to obtain the greatest satisfaction from their actions, with the objective of maximizing benefits while minimizing costs.

Indifference Curve

A graphical representation showing different combinations of goods among which a consumer is indifferent.