A simple linear regression model
relating a bank lending interest rate and investment in physical
capital by companies is stated as:
- Which variable (lending interest rate or investment in physical
capital) do you think should be the dependent variable in this
regression model? Please justify your
answer.
[2
points]
- What sign would you expect for the slope of this regression
model for interest rate and investment in physical capita? Please
justify your answer.
[2
points]
- What is the role of the error term in the simple linear
regression model like the one stated above? Please state at least
three examples of the factors that you think belong in the error
term of the simple linear regression model stated above briefly
justifying each example.
[3 points]