Question: (20 points) In recent years, many American firms have intensified their efforts to market their products in the Pacific Rim. A consortium of U.S. firms that produce raw materials used in Singapore is interested in predicting the level of exports from the U.S. to Singapore, as well as understanding the relationship between U.S. exports to Singapore and certain variables affecting the economy of that country. The consortium hired an economist to perform an analysis.

The economist obtained monthly data on five economic variables for the period January 1994 to July 1999 (a total of 67 months) from the Monetary Authority of Singapore. These variables are as follows:

Exports: U.S. exports to Singapore in billions of Singapore dollars,

(the dependent variable)

M1: money supply figures in billions of Singapore dollars

Lend: minimum Singapore bank lending rate in percentage

Price: index of local prices where the base year is 1994

Exchange: exchange rate of Singapore dollars per U.S. dollar

Part I.

The economist performed a multiple regression analysis with Exports as the dependent variable and the four economic variables M1, Lend, Price, and Exchange as the explanatory variables. Part of his regression results are shown below:

(a) Calculate a 95% confidence interval for the true coefficient of the variable Exchange. Which variable(s) among the four do you think is(are) an important explanatory variable(s) for Exports? Explain your answer.

(b) The economist next computed the sample correlation between Price and Lend, which turns out to be 0.745. What problems, if any, can you identify in Regression I based on this information? How would you modify the model to avoid these problems?