FILE In August 2010, the Departm ent of Commerce reported that economic weakness continues across the country w ith consumer spending continuing to stagnate.

The governm ent is considering various tax benefits to stim ulate consumer spending through increased disposable income. The consum ption function is one of the key relationships in economics, where consum ption y depends on disposable income x. Consider the quarterly data for these seasonally adjusted variables, measured in billions o f dollars. A portion of the data is shown in the accompanying table; the com plete data set is on the text website, labeled Consumption Quarterly.

Date Consumption ($ billions)
Disposable Income ($ billions)
2006:01 9148.2 9705.2 2006:02 9266.6 9863.8 2010:04 10525.2 11514.7 SOURCE: U.S. D e p a r tm e n t o f C o m m e rc e .

a. Estimate Consumption = β 0 + β 1 Disposable Income +
ε . Plot the residuals against tim e to determ ine if there is a possibility o f serial correlation.

b. Discuss the consequences o f serial correlation and suggest a possible remedy.