Consider the following simple demand function for money:
Mt = βoYt β1 rt β2 et ut
Where Mt = aggregate real cash balances at time t, Yt = aggregate real national income at time t, rt = long-term interest rate, and et = error term at time t.
Given the following data:
a. What are the real income and interest rate elasticities of real cash balances?
b. Are the preceding elasticities statistically significant individually?
c. Test the overall significance of he estimated regressions.
d. Is the income elasticity of demand for real cash balances significantly different from one?
e. Should the interest rate variable be retained in the model? Why?