NEAS: The candidate correctly performs the statistical tests. When the inflation rate is not constant, the σ2 is higher, the R2 is lower, and the standard error of the β estimator is higher. These differences can be caused by many factors, such as higher volatility in the data. To see if the β parameter (the inflation rate) is not constant, the candidate examines the residual plots. The plot is a V shape, indicating a non-constant parameter.
To analyze a discrete change to the β parameter, the candidate uses a dummy variable. The statistical tests show better results and (most important), the V shaped residual plot changes to a straight line.
A continuous change in the β parameter causes a parabola shaped residual plot. The candidate uses a third independent variable to change the parabola to a straight line.
Some candidates wonder how long the student project takes. If you do not understand the uses of the statistical tests, dummy variables, residual plots, and the effects of various items on the regression, you will find the student project obscure. Once you master the concepts, the student project shows you can apply them to real data.
We do not show the Excel worksheets that the candidate submitted. You must create the worksheets for your own project to demonstrate that you correctly apply the statistical concepts. We show the write-up on this discussion board so you can see what a sample student project does.