Answer: 3

## Explanation When modeling quarterly seasonality with an intercept term, the correct number of dummy variables to use is **3**. ### Key Concepts: - **Dummy Variable Trap**: When using dummy variables for categorical data with k categories, we use k-1 dummy variables to avoid perfect multicollinearity. - **Quarterly Data**: There are 4 quarters in a year. - **Intercept Term**: The intercept represents the baseline level for the omitted category. ### Why 3 Dummy Variables? - With 4 quarters, we need 4-1 = 3 dummy variables - The intercept captures the baseline for the omitted quarter - Each dummy variable represents the deviation from the baseline for its respective quarter ### Example: If we omit Q4 as the baseline: - D1 = 1 for Q1, 0 otherwise - D2 = 1 for Q2, 0 otherwise - D3 = 1 for Q3, 0 otherwise - Q4 is captured by the intercept when all dummies = 0 Using 4 dummy variables would create perfect multicollinearity with the intercept, making the model unidentifiable.

Author: LeetQuiz .