THE NEXT QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION:
Consider the following model: Y = β₀ + β₁X₁_t + β₂X₂_t + γY_t_-1.Suppose we increase X₁ by one unit in time period t,with all other independent variables in the model held fixed.
-What is the total expected increase in the dependent variable over time period t and all future time periods?

Question

Quizplus · Accepted Answer

The total expected increase in the dependent variable when X₁ increases by one unit, with all other variables held constant, is given by the coefficient of the variable of interest (β₁) divided by (1 - γ), where γ represents the rate at which the effect of the change in the independent variable diminishes over time. This formula accounts for the immediate impact of the change and its diminishing effect in all future periods.