Q1. The Australian dollar is regarded as a commodity currency. Assuming that demand for iron ore is not affected by changes in commodity prices, this implies that an increase in the commodity price drives the external value of the Australian dollar. Panel 1A is a plot of the commodity price index (CP) that captures the iron ore price. Panel 1B is a plot of the external value of AUD expressed in terms of the Chinese Yuan (EXRATE) for the period Feb 2010 to Aug 2021. Panel 1A 160 Panel 1B 7.5 140 7.0 120 6.5 100 6.0 5.5 80 5.0 50 4.5 40 10 11 12 13 14 15 16 17 18 19 20 21 4.0 10 11 12 13 14 15 16 17 18 19 20 21 (a) Briefly explain the movement of the CP and EXRATE. [2] (b) Panel 1C and 1D show the Augmented Dickey-Fuller (ADF) test results for the log(exrate) (i.e., LEXRATE) and the log(CP) (i.e., LCP). Why is the ADF test preferred to the DF test? [2] (c) Write down the unit root test regression specification. [2] Panel 1C (LEXRATE) Panel 1D (LCP) Exogenous: Constant, Linear Trend Exogenous: Constant, Linear Trend Lag Length: 0 (Automatic - based on SIC, maxlag=13) Lag Length: 1 (Automatic - based on SIC, maxlag=13) t-Statistic Prob. * t-Statistic Prob.* Augmented Dickey-Fuller test Augmented Dickey-Fuller test statistic -2.422430 0.3664 statistic -1.613724 0.7827 Test critical Test critical values: 1% level 4.025924 values: 1% level 4.026429 5% level 3.442712 5% level -3.442955 10% 10% level -3.146022 level -3.146165 (d) Interpret the unit root test results in Panels 1(c) and 1(d). What can you infer about the stationarity property of LCP and LEXRATE? [2]