The timeplot shown to the right shows the values of two indices of the economy i

ID: 3049385 • Letter: T

Question

The timeplot shown to the right shows the values of two indices of the economy in a country: Inflation (left axis, in red, measured as the year-over-year change in a price index) and the Survey of Consumer Sentiment (right axis, in blue, from a university). Both series are monthly and cover the time period January 2004 through December 2005. Complete parts a through e.

(c) Estimate the correlation between these two series.

A. The correlation r is approximately 0.55.

B. The correlation r is approximately .30.

C. The correlation r is approximately 0.30.

D. The correlation r is approximately 0.

E. The correlation r is approximately 0.05.

(d) When looking at the relationship between two time series, what are the advantages of these two plots? Each shows some things, but hides others. Which helps you visually estimate the correlation? Which tells you the timing of the extreme lows and highs of each series?

Choose the correct answer below.

A. The scatterplot shows the timing of the events. The timeplot shows the contemporaneous association more clearly and reveals the linear association.

B. The scatterplot shows the contemporaneous association more clearly, reveals the linear association, and shows the timing of the events.

C. The timeplot shows the timing of the events. The scatterplot shows the contemporaneous association more clearly and reveals the linear association.

D. The timeplot shows the contemporaneous association more clearly, reveals the linear association, and shows the timing of the events.

(e) Does either plot prove that inflation causes changes in consumer sentiment?

A. No. The plots are only able to show association, not causation. Other factors in the economy could cause both series to move.

B. Yes. The timeplot shows that inflation causes changes in consumer sentiment.

C. Yes. The scatterplot shows that inflation causes changes in consumer sentiment.