Question

A regression equation from an Indian bank: Ŷ = 2.5 + 0.8X₁ − 0.3X₂. p-values: α̂: 0.03, β̂₁: 0.02, β̂₂: 0.08. At 5% significance level, which is correct?

Q: Answer-A regression equation from an Indian bank: Ŷ = 2.5 + 0.8X₁ − 0.3X₂. p-values: α̂: 0.03, β̂₁: 0.02, β...

We cannot confidently reject H 0. Option C confuses economic significance with statistical significance. Option D is risky dropping a relevant variable causes omitted variable bias.

A All three coefficients are statistically significant; model fully reliable

B Intercept and β₁ are significant; β₂ is NOT significant at 5% — current account deficit does not significantly explain exchange rate stability in this model

C β₂ is most important since it has the largest economic impact regardless of p-value

D Since β₂ is insignificant, the model must be re-estimated dropping X₂ without any consequences