(1) Plot the annual rate of inflation (use the GDP deflator) against the annual 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? Use the quantity equation to solve for these two figures. (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?
M S G R A B C D E F H K N O P Q Germany US Italy Italy Italy Italy Italy Italy US US US Germany Germany Italy Ex Rate Ex Rate Italy (Lira/$) DM/$ CPI CPI CPI Money Interest Rates GDP GDP treasury interest rates Call money Govt bond yield Supply 3-mo 3-yr 10-yr Nominal Real 3-mo 3-yr 10-yr rate 10-yr 6.44 7.29 7.35 8.65 8.3 1970 623 3.6600 81.4 84.1 87.4 49.47 7.38 7.73 9.01 67.18 947.5317 58.97 5.76 8.34 72.99 964.2008 4.34 5.66 6.16 6.16 8 1971 594 3.4908 85.5 88.5 91.0 4.07 5.72 6.21 4.3 7.9 1972 582.5 3. 1886 90.7 93.3 94.2 69.87 5.18 6.59 7.47 79.81 992.6617 100.0 100.0 83.68 6.93 6.92 7.42 96.74 1058.425 7.03 6.95 6.84 10.18 9.3 1973 607.92 2.6726 100.0 7.87 7.82 7.56 8.87 10.4 1974 649.43 2.5878 119.2 106.8 110.9 94.61 14.57 9.61 9.87 122.19 1107.797 7.99 4.4 8.5 1975 683.55 2.4603 139.5 113.2 121.1 118.13 10.64 10.04 11.54 138.63 1083.894 5.82 7.49 13.08 174.87 1154.257 4.99 6.77 7.61 3.89 7.8 1976 875 2.5180 162.8 118.0 128.1 142.63 15.68 12.66 14.71 14.62 214.40 1187.812 5.27 6.69 7.42 4.14 6.2 1977 871.55 2.3222 193.0 122.5 136.3 173.56 14.03 125.7 146.7 214.95 11.49 13.05 13.7 253.54 1231.973 7.22 8.29 8.41 3.36 5.8 1978 829.75 2.008 216.3 248.3 163.4 258.48 11.86 13.02 14.05 309.84 1301.849 10.04 9.71 9.44 5.87 7.4 1979 804 1.8329 130.9 11.46 9.06 8.5 1980 930.5 1.8177 301.2 138.1 185.5 290.05 17.17 15.25 16.11 387.67 1347.949 11.62 11.55 321.54 19.6 19.36 20.58 464.03 1354.041 14.08 14.44 13.91 11.26 10.38 1981 1200 2.2600 359.9 146.7 204.6 1982 1370 2.4266 419.2 154.4 217.2 378.50 20.16 20.22 20.9 543.78 1360.47 10.73 12.92 13 8.67 8.95 8.62 10.45 11.11 5.36 7.89 1983 1659.5 2.5533 480.8 159.6 224.2 429.84 18.44 18.3 18.02 633.41 1377.278 7.78 1984 1935.88 2.8459 532.6 163.4 233.9 479.85 17.27 15.6 14.95 725.68 1415.133 9.39 11.89 12.44 5.55 1678.5 2.9440 581.4 166.9 242.1 530.74 15.25 13.71 13 813.86 1457.225 7.49 9.64 10.62 5.19 6.87 1985 4.57 5.92 1986 1358.13 2.1715 615.7 166.8 246.7 575.96 13.41 11.47 10.52 900.44 1494.01 5.97 7.06 7.68 7.67 8.38 3.72 5.84 1987 1169.25 1.7974 644.8 167.1 255.9 618.61 11.51 10.58 9.65 984.66 1538.772 5.83 654.29 11.29 10.54 10.16 1599.356 6.67 B.26 8.85 4.01 6.1 1988 1305.77 1.7562 677.3 169.3 266.1 1989 1270.5 1.8800 719.8 174.0 278.9 711.48 12.69 11.61 10.72 1196.81 1645.326 8.12 B.56 8.5 6.59 7.09 1990 1130.15 1.6157 765.7 178.6 293.9 759.41 12.38 11.87 11.51 1320.83 1677.884 7.51 8.25 8.55 7.92 8.88 8.63 1991 1151.06 1.6595 814.0 184.8 306.5 807.84 12.18 13.37 13.18 1440.65 1701.287 5.41 6.81 7.86 8.84 7.96 1992 1470.86 1.5617 855.8 192.3 315.7 814.20 13.97 13.67 13.27 1517.60 1714.221 3.46 5.31 7.01 9.42 7.49 6.28 1993 1703.97 1.6533 892.4 200.2 325.2 841.32 10.2 11.21 11.31 1563.27 1699.022 3.02 4.44 5.87 4.27 6.26 7.08 5.35 6.67 1994 1629.74 1.6228 928.5 205.7 333.7 847.42 8.51 10.57 10.56 1653.40 1736.582 1787.28 1787.28 5.51 6.26 6.58 4.5 6.5 1995 1584.72 1.4331 977.3 209.2 343.1 834.15 10.46 11.98 12.21 1530.57 1.5048 1015.7 212.2 353.0 863.29 8.82 8.93 9.4 1902.28 1806.877 5.02 5.99 6.44 3.27 5.63 1996 5.08 1997 1759.19 1.7341 1036.6 216.2 361.3 930.99 6.88 6.47 6.86 1987.16 1843.377 5.07 6.1 6.35 3.18 1.7597 1057.0 218.2 366.8 975.34 4.99 4.55 4.9 2077.37 1876.746 4.82 5.14 5.26 3.41 4.39 1998 1653.1 1817.72 1.8361 1074.4 219.5 375.1 2.95 4.04 4.73 2145.38 1907.683 4.66 5.49 5.64 2.73 4.26 1999 5.84 6.22 6.03 4.11 5.24 A 2000 2105.92 2.1272 1101.7 223.7 387.7 4.39 5.29 5.58 2258.75 1965.498 2001 2164.4 2.1863 1132.6 229.4 398.5 4.26 4.64 5.19 2359.41 2000.178 3.45 4.08 5.02 4.37 4.7 3.32 4.48 5.03 2440.53 2007.345 1.61 3.1 4.61 3.28 4.61 2002 2060.83 2.0816 1160.5 232.4 404.8 2.33 3.36 4.25 2518.94 2012.415 1.01 2.11 4.02 2.32 3.81 2003 1717.33 1.7347 1191.3 234.7 414.0
