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1. (14 points) Let gprice be the quarterly growth rate in average prices, and let gwage be the growth rate in quarterly wages. Consider the
1. (14 points) Let gprice be the quarterly growth rate in average prices, and let gwage be the growth rate in quarterly wages. Consider the time-series regression model below, with standard errors in parentheses. gprice, = -0.00093 + 0.119gwage, + 0.097 gwaget-1 +0.040gwaget-2 + 0.038gwaget-3 +0.016gwaget-4 (0.00057) (0.052) (0.039) (0.016) (0.022) (0.010) a) If the economy experienced a transitory shock to gwage, when (contemporaneous or at what lag) would the shock have the largest impact on gprice? Briefly explain your answer. b) If the economy experienced a permanent shock to gwage, calculate the long-run propensity (i.e., the cumulative effect) of this shock. c) What modeling concern and assumption would you worry most about being violated in a time-series regression model like the one above? Briefly explain what it means to violate this assumption
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