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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