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)
Year1990199119921993199419951996199719981999
M910871045567
GDP688771298910
a)What kind of a data set is being used in this analysis?
b)Plot these data ona scatter diagram. What does the scatter diagram
reveal?
c)Estimate the regression of national income on the quantity of moneyand
interpret the slope and intercept of the regression line.
d)Is the sign of thecoefficient what you would expect from economic
theory?
a)This is a time series data set.
b)The scatter diagram reveals a positive correlation between the quantity of money and Gross Domestic Product.
c)The estimated regression of national income on the quantity of money is Y = 0.0014X + 6.8, where Y is the Gross Domestic Product and X is the quantity of money. The slope of the regression line is 0.0014, which indicates that a 1 million increase in the quantity of money will lead to a 0.0014 million increase in Gross Domestic Product. The intercept of the regression line is 6.8, which indicates that when the quantity of money is 0, the Gross Domestic Product is 6.8 million.
d)Yes, the sign of the coefficient is what is expected from economic theory, as an increase in the quantity of money should lead to an increase in Gross Domestic Product.