You Have Collected Quarterly Data for Real GDP (Y)for the United

question 26

Essay

You have collected quarterly data for real GDP (Y)for the United States for the period 1962:I (first quarter)to 2009:IV.
a.Testing the log of GDP for stationarity,you run the following regression (where the lag length was determined using the AIC): t = 0.03 - 0.0024 lnYt-1 + 0.253 ΔlnYt-1 + 0.167 ΔlnYt-2
(0.03)(0.0014)(0.072)(0.072)
t = 1962:I - 2009:IV,R2 = 0.16,SER = 0.008
Use the ADF statistic with an intercept only to test for stationarity.What is your decision?
b.You have decided to test the growth rate of real GDP for stationarity for the same sample period.The regression is as follows: t = 0.0041 - 0.543 ΔlnYt-1 - 0.186 Δ2lnYt-1
(0.0009)(0.082)(0.071)
t = 1962:I - 2009:IV,R2 = 0.16,SER = 0.008
Use the ADF statistic with an intercept only to test for stationarity.What is your decision?
c.Using the orders of integration terminology,what order of integration is the log level of real GDP? The growth rate?
d.Given that the SER hardly changed in the second equation,why is the regression R2 larger?

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Definitions:

MIRR

Modified Internal Rate of Return, a financial measure used to evaluate the attractiveness of investments, taking into account the cost of capital and the reinvestment rate.

Cost of Capital

A minimum profit rate a business has to achieve on its ventures to sustain its market price and appeal to investors.

MIRR

Modified Internal Rate of Return, a financial measure used to evaluate the profitability of investments, adjusting for differences in cash flow timing and reinvestment rates.

Cost of Capital

The rate of return that a company needs to earn on its investment projects to maintain its market value and satisfy its investors and creditors.