Question
You are an investment analyst and you are trying to build a model explaining a recent uptick in inflation. You have identified three variables which
You are an investment analyst and you are trying to build a model explaining a recent uptick in inflation. You have identified three variables which influence inflation - unemployment, median salary change, and the change in the price level of imports. The regression equation you have constructed is as follows:
Where:
y - Inflation
x1 - Unemployment
x2 - Median salary change
x3 - Change in the price level of imports
While testing for the significance of your regression model, you have determined that all slopes are significantly different from zero, but x1 and x2 (unemployment and median salary change) are not independent, and there is a statistically significant relationship between these two variables.
Critically evaluate this problem and propose a solution.
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