Nominal Wages

Question 1

The following regression line has been estimated with the program STATA

Ŷt = 5.20 + 0.85 xt (R² = 0.80)

Rewrite the estimated line in case:

a) all values of xt are divided by 100 before the line has been estimated

b) all values of yt are divided by 100 before the line has been estimated

c) all values of xt and yt are divided by 100 before the line has been estimated

Please include a short explanation by your answer!

Question 2

The Phillips curve is defined as the relationship between the growth of the (nominal) wages and the level of unemployment

The equation for the Phillips curve:

% ΔW_t = β1 + β2.(1/u_t) + e_t

% ΔW_t * 100 =% increase in nominal wages in the year t

U_t = height of the unemployment rate in the year t

The estimated line:

% Δ Ŵ_t = – 1.51 + 9.06 (1/u_t)

a) determine the estimated value of the natural unemployment rate (in that case nominal wages do not rise:% Δ Ŵt = 0)

b) calculate the first derivative d(% Δ Ŵt)/ d(ut) if u = 1 and, respectively, if u = 3.

c) give an economic explanation for the estimated negative value for the coefficient β1 (-1.51) and the estimated positive value for the coefficient β2 (9.06).