Test 2: Inflation + Correlation

Question 1

Inflation

Answer 1

increase in the price of goods and services (and therefore a decline in the value or purchasing power of money)

Question 2

inflation rate in Canada

Answer 2

1. 1 percent per year
   - it would take 64 years for the price of goods and services to double.
   - Bank of Canada inflation target is 1 to 3 percent. At 2 percent, it would take 35 years for the price of goods and services to double.

Question 3

Calculations

Answer 3

5% Inflation Rate
x+.05x=1.00
1.05x=1.00
x=1.00/1.05
x=.9524

Question 4

red “trend line” or “least-squares regression line”

Answer 4

minimize the sum of the squared distances between each point in the scatterplot and the line

Question 5

r = correlation coefficient

Answer 5

measure of the degree to which points are non-randomly scattered around the regression line

• can vary betw. -1 and 1
• bigger the magnitude of r, the less random the scatter and the stronger the association between two variables

Question 6

Positive r

Answer 6

one variable is directly proportional to the other (as one increases in value, so does the other); thus the trend line slopes upward.

Question 7

Negative r

Answer 7

one variable is inversely proportional to the other (as one increases in value, the other decreases); thus the trend line slopes downward.

Question 8

Caution

Answer 8

While a linear regression line may summarize the relationship between two variables, a curvilinear regression line may provide more information about the data in the scatterplot. Consequently, it is always necessary to inspect scatterplots visually and not just rely on statistical coefficients such as r to interpret the association.

Question 9

Real Dollars

Answer 9

-nominal* dollars minus inflation (so cost in real dollars is the cost of a standard basket of goods and services minus inflation, and income in real dollars is nominal income minus inflation, or purchasing power)