An Econometric Analysis


Equation (1) depicts the regression line, where y is the price index and x is the money supply to real GDP ratio.


Ch7Q2 Equation 7.1 With, the equation becomes as illustrated in Equation (2).

(2) Equation 2 has larger elasticities in the Change in Log of Money Supply Ratio to Real GDP and Change in Log of (M/Y) terms. The elasticities of the terms in the two equations, however, are not appreciably different.


The regression lines are shown in Equations (3), (4), (5) and (6) where y is the per capita total expenditure and x1, x2, x3, and x4 are the food, clothing, housing and fuel, and other items categories of per capita expenditure.





Comparing Equations (3), (4), (5) and (6) with Equations (9.2a) to (9.5a), the elasticities in Equations (3), (4), (5) and (6) are higher.


The main assumptions in the two equations are as follows (Greene, 2012):

The models assume a linear relationship between the dependent variables and the independent variables

The models assume that the independent variables are exogenous.

In determining the parameters of the model, there is an assumption that there is no exact linear relationship of the independent variables

The models also assume nonautocorrelation and homoscedasticity

The independent and dependent variables are normally distributed


The second equation provides a more detailed description of the expenditure on a certain commodity as it encompasses the total consumption expenditure, and the size of the family as opposed to the first equation which only describes the consumption of a certain commodity as a function of the total expenditure.


Greene, W. (2012). Econometric Analysis (7th ed.). New York, NY: Pearson Education Limited.

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