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Term Project

An exercise in macroeconomics:
Recall that in ECO 1002 or any other intro macro, total consumption expenditure is a
unction o disposa!le income "or ater#tax income$% &peciically, 'e ha(e:
Consumption ) a constant * mar+inal propensity to consume ,disposa!le income,
and -mar+inal propensity to consume. is a ixed un/no'n num!er% The constant term in
the a!o(e e0uation is oten assumed to !e 1ero !ut here, 'e ta/e a more +eneral
assumption that the constant can !e any num!er !ut the num!er is un/no'n to us% 2ote
that the a!o(e e0uation as tau+ht in ECO 1002 has no random term in it%
The ollo'in+ data "sample$ is o!tained rom a +o(ernment pu!lication, Economic
Report of the President:
3ear 4isposa!le 5ncome Personal Consumption
1670 781%9 972%1
1671 776%2 969%:
1672 :10%; 7;7%1
167; :9<%7 797%6
167< :87%8 792%:

1678 :7<%6 776%<

1679 609%: :2;%1
1677 6<2%6 :9<%;
167: 6::%: 60;%2
1676 1018%7 627%9
The a!o(e num!ers are in !illions o 1672 dollars, i%e%, they are adjusted or inlation
'hich means they are real =4P and real consumption%
&uppose 'e are interested in the (alue o the mar+inal propensity to consume in the
a!o(e consumption unction% Please estimate its (alue 'ith the a!o(e data and descri!e
your model, estimation procedure and result in a 'ritten report to me "due on the inal
exam day$% 3our report should include the ollo'in+:
"a$ &peciy the statistical model that you are +oin+ to use% 5 it is a linear model,
'hich (aria!le "consumption or income$ is the dependent (aria!le and 'hich is
the independent (aria!le> ?hich 0uantity@notation in the model is the mar+inal
propensity to consume>
"!$ Aind the estimate or the mar+inal propensity to consume !y runnin+ a re+ression
in Excel "or other sot'are o your choice$% 3ou must su!mit your re+ression
output@printout rom Excel "or another pro+ram that you choose$%
"c$ 5s the estimate in part "!$ the "true$ (alue o the mar+inal propensity to consume>
Explain% 5s the estimate in part "!$ close to the true (alue o the mar+inal
propensity to consume> Explain% Also, can you tell rom your estimate, 'hat is
the true (alue o the mar+inal propensity to consume>
"d$ Beriy that your estimate in part "!$ is correct !y manually computin+ the least
s0uares estimate or the mar+inal propensity to consume% 3ou must su!mit a ta!le
"similar to the one that 'e did in class$ that sho's your calculation%
"e$ Accordin+ to your estimate@ans'er in part "!$, i income increases !y 1, 'hat is
your estimate o the chan+e in consumption> ?hat is the chan+e i income
increases !y 2>