 # Question 26 Sample Exam 1 Morning Schweser

Please explain. That would be very much appreciated! An analyst estimated the following regression between the change in real industrial production and industry sales: industry sales= 8950* 395X percentage change in real industrial production. Inflation is expected to be 3 %. If industrial production was \$1.2 trillion last year and is expected to be \$1.25 trillion next year, what is the forecast for industry sales closet to: A: 9397 B 9610 C 10396 D 10596

change in real industrial production = (1.25/1.2)/1.03 = 1.1327% industry sales = 8,950+395*1.1327 = 9,397 A is the answer (had to make a few assumptions about typos)

First you calculate the % change in production which is = 4.16% (i.e. (1.25-1.2) / 1.2 ) This is the nominal change. Then you have to calculate the real change which is : (1.0416/1.03)-1 = 1.1327% Then plug and chug to get 9397. Edit: I’m so slow at this haha

typos in the question?? % change in Real IP = (1.25 - 1.20)/ 1.20 = 4.1667% Converting Real Rates to Nominal Rates (1 + NR) = (1 + 0.041667)/ (1+0.03) (1 + NR) = 1.011327 NR = 1.1327% IS = 8950 + 395 * IP IS = 8950 + 395*1.1327 8950 + 447.4165 = 9397.4165 = A?? - Dinesh S