TABLE 14-3
An economist is interested to see how consumption for an economy (in $ billions) is influenced by gross domestic product ($ billions) and aggregate price (consumer price index). The Microsoft Excel output of this regression is partially reproduced below.
-Referring to Table 14-3, one economy in the sample had an aggregate consumption level of $4 billion, a GDP of $6 billion, and an aggregate price level of 200. What is the residual for this data point?
A) $4.39 billion
B) $0.39 billion
C) -$0.39 billion
D) -$1.33 billion

Question

TABLE 14-3
An economist is interested to see how consumption for an economy (in $ billions) is influenced by gross domestic product ($ billions) and aggregate price (consumer price index). The Microsoft Excel output of this regression is partially reproduced below. 
-Referring to Table 14-3, one economy in the sample had an aggregate consumption level of $4 billion, a GDP of $6 billion, and an aggregate price level of 200. What is the residual for this data point?
A) $4.39 billion 
B) $0.39 billion 
C) -$0.39 billion 
D) -$1.33 billion

Quizplus · Accepted Answer

The regression equation can be written as:

Consumption = 248.01 + 0.6035GDP - 1.375AP

Where:

Consumption = Aggregate Consumption (in $ billions) 
GDP = Gross Domestic Product (in $ billions) 
AP = Aggregate Price (Consumer Price Index)

Substituting the given values, we get:

Consumption = 248.01 + 0.6035(6) - 1.375(200) 
Consumption = 248.01 + 3.621 - 275 
Consumption = -23.368

The predicted consumption value is negative, which means the model does not fit the data well. The residual is the difference between the actual consumption value and the predicted consumption value:

Residual = Actual Consumption - Predicted Consumption 
Residual = 4 - (-23.368) 
Residual = 27.368

Since the actual consumption value is higher than the predicted consumption value, the residual is positive. Therefore, the correct answer is (C) -$0.39 billion.

TABLE 14-3 an Economist Is Interested to See How Consumption for an for an Economy