Analysis of Economic Fluctuations in the United States - Report Example

The correlograms of all the variables except the government non-wage income become zero from the third-order ones. This shows that all the variables except the government's non-wage income describe fluctuating trends in the period of analysis. The government's non-wage income show a steady rising trend in the period of analysis. The correlogram of this variable is not gradually declining and remains the same. The scatter plots show that there is a significant positive correlation between income and consumption.

Though a positive correlation can be seen in income and investment, it is not so significant compared to the previous one.The OLS estimation for consumption shows the perfect model fit. The coefficients for wage income and profit income are positive and significant. One percent rise in wage income leads to a significant rise of 19 percent consumption while a one percent rise in wage income leads to a significant rise of 79 percent in consumption. The actual and fitted values of Consumption show perfect fit, as shown from the graphs in appendix 2.

The 2SLS estimation shows that only wage income is significant in determining consumption. Here the coefficient for wage income has increased to 81.6 percent compared to the OLS estimation. At the same time, profit income lost its significance here. The actual and fitted values show a perfect fit in this case also.For the estimation of investment with OLS, current, and lagged values of profit income are positive and significant while the lagged value of the capital stock is significant and negative in determining investment.

One percent rise in current and lagged values of profit income leads to a significant rise of 47.9 and 33.3 percent in investment while a one percent rise in lagged capital stock value leads to a significant decline of 11.2 percent in the investment.