Intermediate Economics III

  1. 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?
  2. 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
  3. 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

ACED ESSAYS