The Dodge City Bank is planning its loans for the next several years, and is usi
ID: 3298533 • Letter: T
Question
The Dodge City Bank is planning its loans for the next several years, and is using the model of loan demand developed from past experience. Fred Smith is responsible for developing the mortgage loan component of total loan demand. Dodge City Bank is the leader in the community, and other banks follow its announced rates. The model that Fred uses is the following, estimated on 14 years of data: Q = 50 -.15P -.2D + .4Y + .15H R2 = .844 (17) (.13)(.16) (.08) (.06) (standard errors are in parentheses) where Qt = mortgage loan demand in millions of dollars in year t, Pt = prime rate in year t, Dt = discount rate in year t, Yt = per capita income in Dodge City in year t, in thousands of dollars, and Ht = average housing price in Dodge City in year t, in thousands of dollars. a. Evaluate these regression results, including computation of t-statistics, coefficients and R2. b. Fred thinks there that the discount rate will be 6% in the year, the prime rate 7.75%, per capita income in Dodge City will be $21,000 and housing prices will be $65,000. How many loans can Dodge City Bank expect to make in the next year?
Explanation / Answer
a) R^2 = 0.844 which means 84.4 % of variation in Q is explained by this model
TS = estimate/standard error
for
df =n-k-1 = 17 -4-1 = 12
critical value = 2.179
hence Y and H are statistically significant as |TS| > critical value
b. Fred thinks there that the discount rate will be 6% in the year, the prime rate 7.75%, per capita income in Dodge City will be $21,000 and housing prices will be $65,000
Q = 50 -.15P -.2D + .4Y + .15H
= 50 -0.15 * 7.75 - 2* 6 + 0.4* 21 + 0.15 *65
= 54.9875
Please rate my solution
P -0.15 0.13 -1.15385 D -0.2 0.16 -1.25 Y 0.4 0.08 5 H 0.15 0.06 2.5Related Questions
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