6. Assume that you in charge of the Central Bank (BOT). You are given the following information on macro- economic variable, quantity of money

(M) and Gross Domestic Product (GDP) in million (TShs)
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 M 9 10 8 7 10 4 5 5 6 7 GDP6 8 8 7 7 12 9 8 9 10
i. What kind of a data set is being used in this analysis?
ii. Plot these data on a scatter diagram. What does the scatter diagram reveal?
iii. Estimate the regression of national income on the quantity of money and interpret the slope and intercept of the regression line.

1 answer

i. This is a time series data set.

ii. The scatter diagram reveals that there is a positive correlation between the quantity of money and Gross Domestic Product.

iii. The estimated regression of national income on the quantity of money is: GDP = 0.7M + 6.2. The slope of the regression line (0.7) indicates that a one unit increase in the quantity of money leads to a 0.7 unit increase in Gross Domestic Product. The intercept (6.2) indicates that when the quantity of money is zero, the Gross Domestic Product is 6.2 million.