(1) Plot the annual rate of inflation (use the GDP deflator) against the annul rate of money supply growth Comment on the observed relationship in light of theory (2) Do the same thing as in (1) but use 3 year moving averages of both series instead of the yearly observations Comment on this relationship and on the difference between it and the previous relationship The following table contains averages of the data for two subperiods All figures are in percent per annum terms M P Y 1970 85 15 7 13 8 2 9 1986 98 6 5 5 3 1 9 (3) What happened to average rates of real income growth and k growth in these two time periods (4) Use the quantity equation to explain the patterns in the data (5) The decline in money supply growth began with a sharp deceleration in 1980 What does theory suggest about the likely short run effect on real income growth following this change Do we observe such an effect in the data Answer the questions from the information given in the excel Italy Ex Rate Ex Rate Money Interest Rates CPI Overall GDP GDP GDP US US US US Germany Germany Germany (Lira $) DM $ Supply BOP Nominal Real Deflator CPI treasury interest rates CPI Call money Govt bond yield M2 3 mo 3 yr 10 yr (Lira bil ) (1995 100) 3 mo 3 yr 10 yr rate 10 yr 1970 623 3 6600 49 47 7 38 7 73 9 01 14 148 81 67 18 947 5317 7 09 36 1 6 44 7 29 7 35 50 4 8 65 8 3 1971 594 3 4908 58 97 5 76 7 8 34 14 7 658 35 72 99 964 2008 7 57 37 6 4 34 5 66 6 16 53 0 6 16 8 1972 582 5 3 1886 69 87 5 18 6 59 7 47 15 6 489 7 79 81 992 6617 8 04 38 9 4 07 5 72 6 21 55 9 4 3 7 9 1973 607 92 2 6726 83 68 6 93 6 92 7 42 17 2 49 78 96 74 1058 425 9 14 41 3 7 03 6 95 6 84 59 9 10 18 9 3 1974 649 43 2 5878 94 61 14 57 9 61 9 87 20 5 789 56 122 19 1107 797 11 03 45 8 7 87 7 82 7 56 64 0 8 87 10 4 1975 683 55 2 4603 118 13 10 64 10 04 11 54 24 2011 59 138 63 1083 894 12 79 50 5 82 7 49 7 99 67 8 4 4 8 5 1976 875 2 5180 142 63 15 68 12 66 13 08 28 1731 67 174 87 1154 257 15 15 52 9 4 99 6 77 7 61 70 7 3 89 7 8 1977 871 55 2 3222 173 56 14 03 14 71 14 62 33 2 5493 09 214 40 1187 812 18 05 56 3 5 27 6 69 7 42 73 4 4 14 6 2 1978 829 75 2 0086 214 95 11 49 13 05 13 7 37 2 3424 72 253 54 1231 973 20 58 60 6 7 22 8 29 8 41 75 3 3 36 5 8 1979 804 1 8329 258 48 11 86 13 02 14 05 42 7 2473 72 309 84 1301 849 23 80 67 5 10 04 9 71 9 44 78 4 5 87 7 4 1980 930 5 1 8177 290 05 17 17 15 25 16 11 51 8 682 68 387 67 1347 949 28 76 76 6 11 62 11 55 11 46 82 7 9 06 8 5 1981 1200 2 2600 321 54 19 6 19 36 20 58 61 9 1088 98 464 03 1354 041 34 27 84 5 14 08 14 44 13 91 87 9 11 26 10 38 1982 1370 2 4266 378 50 20 16 20 22 20 9 72 1 10731056 543 78 1360 47 39 97 89 7 10 73 12 92 13 92 5 8 67 8 95 1983 1659 5 2 5533 429 84 18 44 18 3 18 02 82 7 8923 38 633 41 1377 278 45 99 92 6 8 62 10 45 11 11 95 6 5 36 7 89 1984 1935 88 2 8459 479 85 17 27 15 6 14 95 91 6 4497 64 725 68 1415 133 51 28 96 6 9 39 11 89 12 44 97 9 5 55 7 78 1985 1678 5 2 9440 530 74 15 25 13 71 13 100 10722934 813 86 1457 225 55 85 100 7 49 9 64 10 62 100 0 5 19 6 87 1986 1358 13 2 1715 575 96 13 41 11 47 10 52 105 9 3499 71 900 44 1494 01 60 27 101 9 5 97 7 06 7 68 99 9 4 57 5 92 1987 1169 25 1 7974 618 61 11 51 10 58 9 65 110 9 7089 52 984 66 1538 772 63 99 105 7 5 83 7 67 8 38 100 1 3 72 5 84 1988 1305 77 1 7562 654 29 11 29 10 54 10 16 116 5 10955 86 1092 84 1599 356 68 33 109 9 6 67 8 26 8 85 101 4 4 01 6 1 1989 1270 5 1 8800 711 48 12 69 11 61 10 72 123 8 15583 9 1196 81 1645 326 72 74 115 2 8 12 8 56 8 5 104 2 6 59 7 09 1990 1130 15 1 6157 759 41 12 38 11 87 11 51 131 7 13925 64 1320 83 1677 884 78 72 121 4 7 51 8 25 8 55 107 0 7 92 8 88 1991 1151 06 1 6595 807 84 12 18 13 37 13 18 140 8334 08 1440 65 1701 287 84 68 126 6 5 41 6 81 7 86 110 7 8 84 8 63 1992 1470 86 1 5617 814 20 13 97 13 67 13 27 147 2 13203332 1517 60 1714 221 88 53 130 4 3 46 5 31 7 01 115 2 9 42 7 96 1993 1703 97 1 6533 841 32 10 2 11 21 11 31 153 5 4934 32 1563 27 1699 022 92 01 134 3 3 02 4 44 5 87 119 9 7 49 6 28 1994 1629 74 1 6228 847 42 8 51 10 57 10 56 159 7 2540 01 1653 40 1736 582 95 21 137 8 4 27 6 26 7 08 123 2 5 35 6 67 1995 1584 72 1 4331 834 15 10 46 11 98 12 21 168 1 4566 82 1787 28 1787 28 100 00 141 7 5 51 6 26 6 58 125 3 4 5 6 5 1996 1530 57 1 5048 863 29 8 82 8 93 9 4 174 7 18371 44 1902 28 1806 877 105 28 145 8 5 02 5 99 6 44 127 1 3 27 5 63 1997 1759 19 1 7341 930 99 6 88 6 47 6 86 178 3 22395 25 1987 16 1843 377 107 80 149 2 5 07 6 1 6 35 129 5 3 18 5 08 1998 1653 1 1 7597 975 34 4 99 4 55 4 9 181 8 18605133 2077 37 1876 746 110 69 151 5 4 82 5 14 5 26 130 7 3 41 4 39 1999 1817 72 1 8361 2 95 4 04 4 73 184 8 14634 6 2145 38 1907 683 112 46 154 9 4 66 5 49 5 64 131 5 2 73 4 26 2000 2105 92 2 1272 4 39 5 29 5 58 189 5 6837 9 2258 75 1965 498 114 92 160 1 5 84 6 22 6 03 134 4 11 5 24 2001 2164 4 2 1863 4 26 4 64 5 19 194 8 1272 45 2359 41 2000 178 117 96 164 6 3 45 4 08 5 02 137 4 4 37 4 7 2002 2060 83 2 0816 3 32 4 48 5 03 199 6 6531 2440 53 2007 345 121 58 167 2 1 61 3 1 4 61 139 2 3 28 4 61 2003 1717 33 1 7347 2 33 3 36 4 25 204 9 1914 58 2518 94 2012 415 125 17 171 1 01 2 11 4 02 140 6 2 32 3 81

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(1) Plot the annual rate of inflation (use the GDP deflator) against the annul rate of money supply growth. Comment on the observed relationship in

(1) Plot the annual rate of inflation (use the GDP deflator) against the annul rate of money supply growth. Comment on the observed relationship in light of theory. (2) Do the same thing as in (1) but use 3-year moving averages of both series instead of the yearly observations. Comment on this relationship and on the difference between it and the previous relationship. The following table contains averages of the data for two subperiods. All figures are in percent per annum terms. M P Y 1970-85 15.7 13.8 2.9 1986-98 6.5 5.3 1.9 (3) What happened to average rates of real income growth and k growth in these two time periods? (4) Use the quantity equation to explain the patterns in the data. (5) The decline in money supply growth began with a sharp deceleration in 1980. What does theory suggest about the likely short-run effect on real income growth following this change? Do we observe such an effect in the data?

Answer the questions from the information given in the excel

Italy	Ex Rate	Ex Rate	Money	Interest Rates			CPI	Overall	GDP	GDP	GDP	US	US	US	US	Germany	Germany	Germany
	(Lira/$)	DM/$	Supply					BOP	Nominal	Real	Deflator	CPI	treasury interest rates			CPI	Call money	Govt bond yield
			M2	3-mo	3-yr	10-yr		(Lira bil.)			(1995=100)		3-mo	3-yr	10-yr		rate	10-yr
1970	623	3.6600	49.47	7.38	7.73	9.01	14	148.81	67.18	947.5317	7.09	36.1	6.44	7.29	7.35	50.4	8.65	8.3
1971	594	3.4908	58.97	5.76	7	8.34	14.7	658.35	72.99	964.2008	7.57	37.6	4.34	5.66	6.16	53.0	6.16	8
1972	582.5	3.1886	69.87	5.18	6.59	7.47	15.6	-489.7	79.81	992.6617	8.04	38.9	4.07	5.72	6.21	55.9	4.3	7.9
1973	607.92	2.6726	83.68	6.93	6.92	7.42	17.2	-49.78	96.74	1058.425	9.14	41.3	7.03	6.95	6.84	59.9	10.18	9.3
1974	649.43	2.5878	94.61	14.57	9.61	9.87	20.5	-789.56	122.19	1107.797	11.03	45.8	7.87	7.82	7.56	64.0	8.87	10.4
1975	683.55	2.4603	118.13	10.64	10.04	11.54	24	-2011.59	138.63	1083.894	12.79	50	5.82	7.49	7.99	67.8	4.4	8.5
1976	875	2.5180	142.63	15.68	12.66	13.08	28	1731.67	174.87	1154.257	15.15	52.9	4.99	6.77	7.61	70.7	3.89	7.8
1977	871.55	2.3222	173.56	14.03	14.71	14.62	33.2	5493.09	214.40	1187.812	18.05	56.3	5.27	6.69	7.42	73.4	4.14	6.2
1978	829.75	2.0086	214.95	11.49	13.05	13.7	37.2	3424.72	253.54	1231.973	20.58	60.6	7.22	8.29	8.41	75.3	3.36	5.8
1979	804	1.8329	258.48	11.86	13.02	14.05	42.7	2473.72	309.84	1301.849	23.80	67.5	10.04	9.71	9.44	78.4	5.87	7.4
1980	930.5	1.8177	290.05	17.17	15.25	16.11	51.8	682.68	387.67	1347.949	28.76	76.6	11.62	11.55	11.46	82.7	9.06	8.5
1981	1200	2.2600	321.54	19.6	19.36	20.58	61.9	-1088.98	464.03	1354.041	34.27	84.5	14.08	14.44	13.91	87.9	11.26	10.38
1982	1370	2.4266	378.50	20.16	20.22	20.9	72.1	10731056	543.78	1360.47	39.97	89.7	10.73	12.92	13	92.5	8.67	8.95
1983	1659.5	2.5533	429.84	18.44	18.3	18.02	82.7	8923.38	633.41	1377.278	45.99	92.6	8.62	10.45	11.11	95.6	5.36	7.89
1984	1935.88	2.8459	479.85	17.27	15.6	14.95	91.6	4497.64	725.68	1415.133	51.28	96.6	9.39	11.89	12.44	97.9	5.55	7.78
1985	1678.5	2.9440	530.74	15.25	13.71	13	100	10722934	813.86	1457.225	55.85	100	7.49	9.64	10.62	100.0	5.19	6.87
1986	1358.13	2.1715	575.96	13.41	11.47	10.52	105.9	3499.71	900.44	1494.01	60.27	101.9	5.97	7.06	7.68	99.9	4.57	5.92
1987	1169.25	1.7974	618.61	11.51	10.58	9.65	110.9	7089.52	984.66	1538.772	63.99	105.7	5.83	7.67	8.38	100.1	3.72	5.84
1988	1305.77	1.7562	654.29	11.29	10.54	10.16	116.5	10955.86	1092.84	1599.356	68.33	109.9	6.67	8.26	8.85	101.4	4.01	6.1
1989	1270.5	1.8800	711.48	12.69	11.61	10.72	123.8	15583.9	1196.81	1645.326	72.74	115.2	8.12	8.56	8.5	104.2	6.59	7.09
1990	1130.15	1.6157	759.41	12.38	11.87	11.51	131.7	13925.64	1320.83	1677.884	78.72	121.4	7.51	8.25	8.55	107.0	7.92	8.88
1991	1151.06	1.6595	807.84	12.18	13.37	13.18	140	-8334.08	1440.65	1701.287	84.68	126.6	5.41	6.81	7.86	110.7	8.84	8.63
1992	1470.86	1.5617	814.20	13.97	13.67	13.27	147.2	13203332	1517.60	1714.221	88.53	130.4	3.46	5.31	7.01	115.2	9.42	7.96
1993	1703.97	1.6533	841.32	10.2	11.21	11.31	153.5	-4934.32	1563.27	1699.022	92.01	134.3	3.02	4.44	5.87	119.9	7.49	6.28
1994	1629.74	1.6228	847.42	8.51	10.57	10.56	159.7	2540.01	1653.40	1736.582	95.21	137.8	4.27	6.26	7.08	123.2	5.35	6.67
1995	1584.72	1.4331	834.15	10.46	11.98	12.21	168.1	4566.82	1787.28	1787.28	100.00	141.7	5.51	6.26	6.58	125.3	4.5	6.5
1996	1530.57	1.5048	863.29	8.82	8.93	9.4	174.7	18371.44	1902.28	1806.877	105.28	145.8	5.02	5.99	6.44	127.1	3.27	5.63
1997	1759.19	1.7341	930.99	6.88	6.47	6.86	178.3	22395.25	1987.16	1843.377	107.80	149.2	5.07	6.1	6.35	129.5	3.18	5.08
1998	1653.1	1.7597	975.34	4.99	4.55	4.9	181.8	18605133	2077.37	1876.746	110.69	151.5	4.82	5.14	5.26	130.7	3.41	4.39
1999	1817.72	1.8361		2.95	4.04	4.73	184.8	-14634.6	2145.38	1907.683	112.46	154.9	4.66	5.49	5.64	131.5	2.73	4.26
2000	2105.92	2.1272		4.39	5.29	5.58	189.5	6837.9	2258.75	1965.498	114.92	160.1	5.84	6.22	6.03	134	4.11	5.24
2001	2164.4	2.1863		4.26	4.64	5.19	194.8	-1272.45	2359.41	2000.178	117.96	164.6	3.45	4.08	5.02	137.4	4.37	4.7
2002	2060.83	2.0816		3.32	4.48	5.03	199.6	6531	2440.53	2007.345	121.58	167.2	1.61	3.1	4.61	139.2	3.28	4.61
2003	1717.33	1.7347		2.33	3.36	4.25	204.9	1914.58	2518.94	2012.415	125.17	171	1.01	2.11	4.02	140.6	2.32	3.81