You are told that the unemployment rate might have a

Question

You collect data on 26 metropolitan areas to analyze average monthly debt payments in terms of income and the unemployment rate. A portion of the data is shown in the accompanying table; the complete data set can be found on the text website, labeled Debt Payments.

a. Estimate the model Debt = β₀ + β₁ lnc + β₂ Unemp + ε. Is unemployment significant at the 5% level?

b. You are told that the unemployment rate might have a quadratic influence on monthly debt payments. Provide an intuitive justification for this claim.

c. Estimate Debt = β₀ + β₁ lnc + β₂Unemp + β₃ Unemp² + ε to determine if Unemp and Unemp² are jointly significant at the 5% level.