It Has Been Argued That Canada's Aggregate Output Growth and Unemployment

question 6

Essay

It has been argued that Canada's aggregate output growth and unemployment rates are very sensitive to United States economic fluctuations, while the opposite is not true.
(a)A researcher uses a distributed lag model to estimate dynamic causal effects of U.S. economic activity on Canada. The results (HAC standard errors in parenthesis)for the sample period 1961:I-1995:IV are: $\begin{aligned}\widehat { \text { urcan } _ { t } = } & - 1.42 + 0.717 \times \text { urust } + 0.262 \times \text { urust } - 1 + 0.023 \times \text { urust } - 2 - 0.083 \times \text { urust } - 3 \\& ( 0.83 ) ( 0.457 )\quad \quad ( 0.557 )\quad\quad\quad\quad\quad\quad\quad(0.398)\quad\quad\quad\quad\quad(0.405) \\& - 0.726 \times \text { urust } - 4 + 1.267 \times \text { urust } - 5 ; R 2 = 0.672 , \text { SER } = 1.444 \\& ( 0.504 ) \quad ( 0.385 )\end{aligned}$
where urcan is the Canadian unemployment rate, and urus is the United States unemployment rate.
Calculate the long-run cumulative dynamic multiplier.
(b)What are some of the omitted variables that could cause autocorrelation in the error terms? Are these omitted variables likely to uncorrelated with current and lagged values of the U.S. unemployment rate? Do you think that the U.S. unemployment rate is exogenous in this distributed lag regression?

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Definitions:

Cost-Plus Approach

A pricing strategy where the selling price of a product is determined by adding a specific markup to its production cost.

Differential Income

The difference in income between two alternative decisions or scenarios.

Fixed Expenses

Costs that do not change in total regardless of changes in the amount of goods or services produced or sold, such as rent, salaries, or insurance premiums.

Markup Percentage

A measure of the difference between the cost of a product and its selling price, expressed as a percentage of the cost.