Included are measures for consumer credit (ConsCredit), inflation measured by the Consumer Price Index (CPI), the Federal Funds rate, GDP, the broad stock market (S&P 500), and M1and M2 data are included for years from 2002-2017, which means 15 years of changes will exist. The data for monetary aggregates (M1 and M2) are in $Billions for the US data available at the Federal Reserve website. http://www.federalreserve.gov/datadownload/, http://research.stlouisfed.org,
Compute the rate of change in: M1, M2, S&P 500, and ConsCredit. That is, compute the year-to-year changes in the growth rates of these variables.
1. Calculate the year-to-year changes in the Federal funds rate.
2. Compute the average growth rate or average year-to-year change for each of the variables from your calculations in (1) and (2).
3. Create a correlation matrix using the results from (1) and (2). (In Excel, go to Tools>Data Analysis>Correlation.)
4. Using the correlation matrix, discuss the relationships between:
a. The rates of change in M1, M2, and the yearly changes in inflation.
b. The year-to-year changes in the Fed Funds rate and CPI.
c. Consumer credit to the rate of change in M2 and the growth rate of GDP.
d. The rate of change in M2 and the growth rate of the S&P 500 index.
5. Graph the growth rates of the variables and discuss noticeable time trends.
6. Apply OLS regression with money supply measures and inflation. (use money supply measures as explanatory variables) Comment on the relationship that you find. Is it as expected?
Comments may be included on the spreadsheet or on a separate sheet. Example of discussion between economic variables:
The Fed Funds rate and Inflation: Suppose that the correlation between these two variables were negative. As we have learned this semester, the monetary policy of the Federal Reserve has shifted from a goal of full employment to a goal of low price inflation combined with sustainable economic growth. Thus, as inflation increases, threatening economic growth, the Fed raises the Fed Funds rate to curtail and prevent higher inflation. So, it should be expected that as the Fed Funds rate is raised, economic growth will slow and inflation will decrease.
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