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The hypotheses are:
The null hypothesis, infers that a unit root exists, whereas the alternative hypothesis, concludes that there is no root.
Decision rule:
If t* > ADF critical value, -> not reject null hypothesis, i.e., unit root exists.
If t* < ADF critical value, -> reject null hypothesis, i.e., unit root does not exist.
An important note is that during these tests, there was no differencing. This would have removed potentially vital information from the results.
Consider the following macroeconomic model: Y = C + I + G + NX C = 100 + 0.8 YD I = 300 - 1000 i NX = 195 - 0.1 Y - 100 (E.R.) E.R. = 0.75 + 5 i M = ( 0.8
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