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(a) What do you understand by the term ‘autocorrelation’?

(b) An econometrician suspects that the residuals of her model might be autocorrelated. Explain the steps involved in testing this theory using the Durbin–Watson (DW) test.

(c) The econometrician follows your guidance (!!!) in part (b) and calculates a value for the Durbin–Watson statistic of 0.95. The regression has sixty quarterly observations and three explanatory variables (plus a constant term). Perform the test. What is your conclusion?

(d) In order to allow for autocorrelation, the econometrician decides

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