Answer: 2.07

When we have a total of $ k $ "regressors" (including a constant) and $ n $ observations, the t-test statistic will follow a t-distribution with $ n - k $ degrees of freedom. In this case, $ n = 25 $, $ k = 3 $ Also, this is a two-tailed test. Thus, we would be interested in $ t_{0.025,22} $. We would be looking in the t-tables in the degrees of freedom = 22 rows and the 2.5% column (so that 2.5% is in each tail for a 5% 2-tailed test). The critical value would be 2.07. Option A is incorrect. 1.72 would be the critical value for a 5% one-tailed test or a 10% two-tailed test. Option B is incorrect. This is the critical value obtained if you forget to subtract the number of parameters estimated (3) from the number of observations to get the degrees of freedom, i.e., $ t_{0.025,25} = 2.06 $. Option D is incorrect. 1.64 is the 5% one-sided critical value from the normal distribution. Note: the fact that observations are quarterly is irrelevant in our calculations.

Author: Nikitesh Somanthe