Question: Suppose you are working with a client who wants to predict new home construction. You have a hypothesis that new construction is related in some way to two factors: the prime lending rate; and unemployment. You gather information from the most recent eight quarters, which is displayed below (not the true figures).

Use regression (and multiple regression) in Excel to carry out the following.

(a.) Write down an equation that expresses new construction as a function of the prime lending rate and unemployment.

(b.) Suppose that you anticipate that the prime lending rate will hit 8.0% late in 2012, and at that time you expect unemployment to be 5.8%. Based on these projections, what is your forecast for new construction based on the model in (a.)?

(c.) Which of the two factors plays the more important predictive role? Justify your answer.

(d.) Suppose you had no idea what the unemployment rate would be in 2012, but you thought that you would be able to predict the prime lending rate pretty accurately.

Write down an equation that expresses new construction as a function of the prime lending rate only.