3. Suppose we would like to estimate the effect of city credit ratinglon the municipal bond interest rate mbr. Other factors affecting mbr are tax rate tr, unemployment rate ue, and the ratio of citizens in working age to total population of the city watp. Credit rate classes are indicated as B, BB, BBB, A, AA, AAA, with B the lowest and AAA the highest. a) Define appropriate dummy variables for the credit rating classes and form a (linear) regression model to test whether credit rating affects mbr. b) Present in terms of the model parameter the null hypothesis for testing the hypothesis. c) Given that there are n observations (cities), what test statistic would you use and what are/is the degrees of freedom?



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