3. You came across a recent (24 April 2024) News24 article, "The DRC had the world’s
biggest military spend increase last year—and South Sudan was second.”
You are worried about the increasing defence expenditure of African countries at war and
its impact on economic growth. You collect data for one of the countries from 1980 to
2023, and you estimate the following model:
Dependent Variable: Gross Domestic Product (GDP)
Explanatory Variables Coefficient Standard Error
Constant 0.0486 0.0242
Lagged GDP (GDPt-1) 0.6527 0.0813
Capital Investment (CI) -0.0025 0.0012
Labour (L) 0.0246 0.0074
Defence expenditure (DE) 0.5883 0.0648
Inflation (INF) 0.0272 0.0152
Recession Dummy (REC)
REC = 1: Recession
REC=0: No recession
-0.0441 0.0254
R-Squared 0.894
Dw-d = 1.654
F-Stat = 27.84
a. What are the expected signs of the variables in this model? Explain. (6)
b. Interpret the estimated coefficients of CI, INF and REC (6)
c. Test the estimated coefficients for statistical significance at the 5% level of significance (12)
d. Test for the joint significance of coefficients using the F-Test (4)
e. Construct a 95% and 99% Confidence Interval for the coefficient of Defence Expenditure
(DE). Which one is wider and why? (6)
f. Is there serial correlation in this model? (4)
g. Regardless of your answer in part d, discuss the remedies of serial correlation. (5