In response to the global financial crisis, Federal Reserve leaders continue to keep the short-run target interest rate near zero. While the Fed controls short-term interest rates, long-term interest rates essentially depend on supply/

demand dynamics, as well as longer-term interest rate expectations. Consider the following annualized rates for 3-month Treasury yields and 10-year Treasury yields.

Year 3-Month Yield (%) 10-Year Yield (%)

2001 3.47 5.02 2002 1.63 4.61 2003 1.03 4.02 2004 1.40 4.27 2005 3.21 4.29 2006 4.85 4.79 2007 4.47 4.63 2008 1.39 3.67 2009 0.15 3.26 2010 0.14 3.21 SOURCE: Federal Reserve Bank of Dallas.

a. Construct and interpret a scatterplot of a 10-year treasury yield against a 3-month yield.

b. Calculate and interpret the sample correlation coefficient. Use α = 0.05 to test if the population correlation coefficient is significantly different from zero.

c. Estimate and interpret a sample regression equation using the 10-year yield as the response variable and the 3-month yield as the explanatory variable.