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Inflation rate

FIGURE 1.4 Money holding in relation to the inflation rate n.

6. From monetary economics it is known that, other things remaining the same, the higher the rate of inflation n, the lower the proportion k of their income that people would want to hold in the form of money, as depicted in Figure 1.4. A quantitative analysis of this relationship will enable the monetary economist to predict the amount of money, as a proportion of their income, that people would want to hold at various rates of inflation.

7. The marketing director of a company may want to know how the demand for the company's product is related to, say, advertising expenditure. Such a study will be of considerable help in finding out the elasticity of demand with respect to advertising expenditure, that is, the percent change in demand in response to, say, a 1 percent change in the advertising budget. This knowledge may be helpful in determining the "optimum" advertising budget.

8. Finally, an agronomist may be interested in studying the dependence of crop yield, say, of wheat, on temperature, rainfall, amount of sunshine, and fertilizer. Such a dependence analysis may enable the prediction or forecasting of the average crop yield, given information about the explanatory variables.

The reader can supply scores of such examples of the dependence of one variable on one or more other variables. The techniques of regression analysis discussed in this text are specially designed to study such dependence among variables.

22 PART ONE: SINGLE-EQUATION REGRESSION MODELS

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