Basic Keynesian theory postulated by the noted British economist John Maynard Keynes in his famous book, The General Theory of Employment, Interest and Money, published in 1936, holds that consumption is a function of income. Below are data taken from the 2009 Economic Report of the President for disposable personal income and personal consumption expenditures for the years indicated in trillions of dollars.

a. Estimate the regression model to test Keynes' theory. The theory states that the marginal propensity to consume (that portion of an extra dollar of income used for consumption purposes) is less than one. Does this appear to be the case? Comment on the regression results.

b. Plot the data in a scatter diagram. Does it appear to be a linear model? How does your answer relate to the coefficient of determination you calculated?

c. Compute and interpret the coefficient of determination and the standard error of the estimate.

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Table Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 extracted Income 7.6 8 8.4 8.9 9.3 9.9 10.4 10.8 11 December Cons 7.1 7.4 7.8 8.3 8.8 9.3 9.8 10.1 10.1 2011: