1. What is meant when we refer to a time series as following a "random walk". Why

is it important to distinguish between a stationary series and a series that follows a

random walk?

2.State the difference between deterministic trend and stochastic trend and how you

render them to be stationary.

3. Assume that the nominal interest rate and inflation have a steady long run relationship.

Explain how (in theory) vector error-correction model (VECM) connects the

short run movements in each of the series to their long run state.