In the following equation, gdp refers to gross domestic product, and FDI refers to foreign direct investment. log(gdp) = 2.65 + 0.527log(bankcredit) + 0.222FDI
(0)13) (0.022) (0.017)

Which of the following statements is then true?
A)If FDI increases by 1%, gdp increases by approximately 22.2%, the amount of bank credit remaining constant.
B)If FDI increases by 1%, gdp increases by approximately 26.5%, the amount of bank credit remaining constant.
C)If FDI increases by 1%, gdp increases by approximately 24.8%, the amount of bank credit remaining constant.
D)If FDI increases by 1%, gdp increases by approximately 52.7%, the amount of bank credit remaining constant.

Question

In the following equation, gdp refers to gross domestic product, and FDI refers to foreign direct investment. log(gdp) = 2.65 + 0.527log(bankcredit) + 0.222FDI
(0)13) (0.022) (0.017)
​
Which of the following statements is then true?
A)If FDI increases by 1%, gdp increases by approximately 22.2%, the amount of bank credit remaining constant.
B)If FDI increases by 1%, gdp increases by approximately 26.5%, the amount of bank credit remaining constant.
C)If FDI increases by 1%, gdp increases by approximately 24.8%, the amount of bank credit remaining constant.
D)If FDI increases by 1%, gdp increases by approximately 52.7%, the amount of bank credit remaining constant.

Quizplus · Accepted Answer

According to the equation, if FDI increases by 1%, gdp increases by approximately 0.222 (0.017) = 0.003774, or 0.3774%. Therefore, to calculate the approximate increase in gdp, we need to multiply this percentage by the coefficient of log(gdp), which is 2.65.

Thus, the approximate increase in gdp = 2.65 x 0.003774 = 0.01, or 1%.

Therefore, if FDI increases by 1%, gdp increases by approximately 1% x 24.8 = 24.8%, the amount of bank credit remaining constant.

Option C is the closest approximation to this calculation.

In the Following Equation, Gdp Refers to Gross Domestic Product