- Money and prices in the short-run. In response to the Great Recession of 2007 –
2009, the Federal Reserve dramatically expanded the supply of money in the US.
Download the following data for the US from FRED:
– M2 Money Stock (M2SL):
https://research.stlouisfed.org/fred2/series/M2SL
– Consumer Price Index for All Urban Consumers (CPIAUCSL):
http://research.stlouisfed.org/fred2/series/CPIAUCSL
– Real Gross Domestic Product (GDPCA):
https://research.stlouisfed.org/fred2/series/GDPCA
Be sure that the data frequencies for M2 and the CPI are monthly and that the data
frequency for real GDP is annual. Set the date range for each series to January 1, 2005
to January 1, 2019.
(a) Plot M2 for the US from January 1, 2005 to January 1, 2019. Make sure that
your graph is titled clearly.
(b) Plot the CPI for the US from January 1, 2005 to January 1, 2019. Make sure
that your graph is titled clearly.
(c) Compute the average annual growth rates of M2, the CPI, and real GDP for the
US over the 2005 – 2019 period using the following formula:
G(X) =
XJan. 1, 2019
XJan. 1, 20051/(2019−2005)
− 1, (1)
where X is either M2, the CPI, or real GDP. You may report your answers as
decimals or percentages.
1
(d) Use the average rates of money and real GDP growth for the US from 2005 to
2019 to compute the average rate of inflation implied by the quantity theory of
money. By how much does the quantity theory of money over-predict the actual
rate of inflation?
(e) What assumption underlying the quantity theory of money is causing the theory
to not well-explain the observed relationship between money growth, real GDP
growth, and inflation from 2005 to 2019? - McCandless and Weber I. The following questions are from the McCandless and
Weber (1995) reading.
(a) McCandless and Weber reach three major conclusions about the long-run relationships between money growth, inflation, and real output growth. What are
these conclusions?
(b) McCandless and Weber uncover an interesting fact about the correlation between
money growth and real output growth for OECD countries. What are OECD
countries, what is the relationship between money growth and real output growth
for OECD countries, and how do McCandless and Weber explain this correlation?
2 - McCandless and Weber II. In this question you will replicate Charts 1, 2, and 4
from McCandless and Weber. Download a file called qtyTheoryData.csv by visiting:
https://www.briancjenkins.com/data/csv/qtyTheoryData.csv
and following the link to “All income levels”. The file contains data on long-run
average money growth, price level growth (inflation), and real GDP growth for about
162 countries. Use a computer program like MS Excel, Numbers for Mac, or Google
Sheets1
to answer the following:
(a) Provide the names and inflation rates of the countries with the 5 highest rates of
inflation.2
(b) Provide the names and inflation rates of the countries with the 5 highest rates of
money growth.
(c) Provide the names and inflation rates of the countries with the 5 lowest rates of
inflation.
(d) Provide the names and inflation rates of the countries with the 5 lowest rates of
money growth.
(e) Using the complete data set qtyTheoryData.csv, construct three well-labeled
scatter plots:
i. Inflation against money growth.
ii. Real GDP growth against money growth.
iii. Real GDP growth against inflation.
Your plots should clearly indicate what is being measured on the horizontal and
vertical axes and each plot should have a clear and easy-to-read title. Submit
only the plots; do not submit your spreadsheet.
1Available for free with Google Drive.
2Hint: use the sort function of your spreadsheet program.
Sample Solution
