Defense Spending

Some experts have suggested that the US economy thrives when the nation is involved in global conflict. The dataset "Defense.xlsx" below contains defense spending and the U.S. GDP for 28 quarters. Build a simple regression model to estimate the impact of the past quarter's (q-1) defense spending on the quarterly U.S. GDP. (30 points total)

a) Make a scatterplot where the residuals are the Y-values (vertical axis) and the lagged (q-1) quarterly defense spending are the X-values (horizontal axis). Based on your scatterplot would you conclude that the residuals and the lagged (q-1) quarterly defense spending are independent? Why or why not? (6 pts)

b) Make a histogram of the residuals where you compare the distribution of the residuals with the normal distribution. Based on your chart would you conclude the residuals are approximately normally distributed? Why or why not? (6 pts)

c) At the .01 level of significance, is the past quarter defense spending a driver of GDP? Justify your conclusion using the regression outputs. (4 pts)

d) What percent of variation in quarterly GDP can be explained by variation in the past quarterly defense spending? Justify your conclusion using the regression outputs. (4 pts)

e) What is the 95% margin of error for forecasts of GDP using the regression model? (5 pts)

f) How much does the predicted quarterly GDP change with a $1 billion increase in defense spending in the past quarter? Provide a 95% confidence interval for your estimate? (5 pts)

Defense.xlsx

Quarter	Defense spending q-1 ($B)	GDP (B$)
6/30/2000	360.90	9,823.00
9/30/2000	375.20	9,862.00
12/31/2000	371.30	9,954.00
3/31/2001	373.80	10,022.00
6/30/2001	383.50	10,129.00
9/30/2001	388.30	10,135.00
12/31/2001	393.00	10,226.00
3/31/2002	405.60	10,338.00
6/30/2002	418.50	10,446.00
9/30/2002	431.70	10,547.00
12/31/2002	436.50	10,618.00
3/31/2003	461.00	10,706.00
6/30/2003	467.40	10,832.00
9/30/2003	506.90	11,086.00
12/31/2003	501.50	11,220.00
3/31/2004	513.10	11,431.00
6/30/2004	537.70	11,649.00
9/30/2004	548.10	11,799.00
12/31/2004	564.10	11,970.00
3/31/2005	555.10	12,173.00
6/30/2005	576.80	12,346.00
9/30/2005	584.30	12,573.00
12/31/2005	605.00	12,731.00
3/31/2006	590.90	13,008.00
6/30/2006	613.50	13,197.00
9/30/2006	616.50	13,323.00
12/31/2006	618.10	13,458.00
3/31/2007	635.80	13,620.00
6/30/2007	633.5