a. Binary variables are introduced in the model to account for qualitative variables being used within the research. However, there are a few issues that will arise without proper usage of these binary variables. List at least two consequences of improper usage of binary variables and how they can be corrected. (4 marks) b. Use the model below to answer the following questions: log(π)=8.58+1.93log( inc )+0.09nx+0.04nx 2
−2.01D e
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(1.912)(0.145)(1.079)(1.677) n=70R 2
=0.47 Durbin − Watson statistic =2.01 Where: π= Inflation Rate inc = Income nx= Net Exports D e
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=I if the country is an emerging economy ​
The standard errors are in 0. i. Interpret the constant and the coefficient of the dummy variable. (4 marks) ii. What is the optimal value of net exports? (2 mark) iii. Test the hypothesis, at the 5% level of significance, that a 1% increase in income causes the inflation rate to increase by 3%. Be sure to show all steps. (6 marks) iv. Is β 3
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unbiased? Show/provide all necessary working and assumptions. (2 marks) v. Are you able to determine if the residuals are autocorrelated? Explain. (2 marks)