THE NEXT QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION

question 166

Essay

THE NEXT QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION:
An economist is in the process of developing a model to predict the price of gold.She believes that the two most important variables are the price of a barrel of oil (x₁)and the interest rate (x₂).She proposes the model y = β₀ + β₁x₁ + β₂x₂ + β₃x₁x₃ + ε.A random sample of 20 daily observations was taken.The computer output is shown below.
THE REGRESSION EQUATION IS
y = 115.6 + 22.3x₁ + 14.7x₂ - 1.36x₁x₂

S = 20.9 R-Sq = 55.4%
ANALYSIS OF VARIANCE

-In the regression model Y = β₀ + β₂X₁ + β₂X₂ + ε,the extent of any multicollinearity can be evaluated by finding the correlation between X₂ and X₂ in the sample.Explain why this is so.

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