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5.29. Refer to Example 5.6 in the chapter. It was shown that the percentage change in the index of hourly earnings and the unemployment rate from 1958-1969 followed the traditional Phillips curve model. An updated version of the data, from 1965-2007, can be found here as Table 5-19, and on the textbook’s Web site.

  1. Create a scattergram using the percentage change in hourly earnings as the Y variable and the unemployment rate as the X variable.  Does the graph appear linear?  
  2. Now create a scattergram as above, but use 1/X as the independent variable. Does this seem better than the graph in part (a)?
  3. Fit Eq. (5.29) to the new data. Does this model seem to fit well? Also create a regular linear (LIV) model as in Eq. (5.30). Which model is better? Why?

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