What are the effects of two independent variables that are highly correlated? What can be done to remedy the problem?
What will be an ideal response?
The high correlation between two variables is called multicollinearity. Multicollinearity results in the standard errors of the coefficients of the independent variables to be inflated, yielding statistically insignificant t-statistics. One could drop one of the two variables and re-estimate the regression model to examine the change in the statistical significance of the remaining regression coefficients.
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Starting from long-run equilibrium, a large decrease in government purchases will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
A. expansionary; lower; potential B. expansionary; higher; potential C. recessionary; lower; potential D. recessionary; lower; lower
Assuming coffee and tea are substitutes, a rise in the price of coffee will have which of the following effects on the market for tea?
a. A movement up along the tea demand curve. b. A movement down along the tea demand curve. c. A leftward shift in the tea demand curve. d. A rightward shift in the tea demand curve.
Under the gold standard, a country with a trade deficit should expect
a. gold to flow out of the country to other countries. b. gold to flow into the country from other countries. c. the value of its currency to appreciate. d. the value of its currency to depreciate.
If producers who hire labor in a competitive labor market decide to purchase the new automated machine that completes the work of 30 employees, in the short run we would expect the:
A. labor-demand curve to shift to the right and wages would increase. B. labor-supply curve to shift to the left and wages would rise. C. labor-demand curve to shift to the left and wages would decrease. D. labor-supply curve to shift to the right and wages would rise.