(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

Question

(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

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(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

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