Economists have long believed that the greater the amount of money printed, the higher the long-term interest rates. Evidence for this view can be found in the corresponding excel worksheet, which gives long -term government bond rate for 31 countries and the growth rate of money supply for each country.

a. Plot the data, and use a regression to find the relation between the money growth and the long-term bond interest rate.

b. If a country has zero money growth, what is the predicted long-term bond interest rate?

c. The monetary authorities in your country are considering increasing the money growth rate by 1% from its current level. Predict by how much this will increase the long-term bond interest rate.

MONEY GROWTH AND BOND Average Average long-term 2 Country money growth bond interest rate 7.40% US 5.65% 6.82% 1960:1-1998:1 7.80% 1965:1-1997:1 Belgium Denmark 8.22% 1960:1-1997:1 10.36% 1960:1-1998:1 France 8.49% 1960:1-1997:1 Germany 8.00% 20% 10.66% 7.31% 8.00% 1960:1-1998:1 12.07% 7.89% 10.64% 1960:1-1997:1 Netherlands 1960:1-1997:1 Norway 1960:1-1998:1 Switzerland 1960:1-1998:1 Canada 8.99% 8.52% 1960:1-1998:1 9.07% Japan 1960:1-1998:1 9.43% 10 . 38% 1960:1-1996:1 Portugal 10.79% 1960:1-1997:1 12.72% 8.95% 1979:1-1997:1 Australia 1960:1-1998:1 New Zealand 10.29% 8.81% 1960:1-1997:1 South Africa 1960:1-1998:1 Honduras 16.20% 15.57% 15.35% 1983:1-1998:1 2 Jamaica 1962:1-1997:1 9.40% Netherlands Antilles 1983:1-1998:1 Trinidad & Tobago 12.14% 1967:1-1992:1 1974:1-1998:1 16.53% 8.59% 7. 88% Korea 15.12% 15.55% 1981:1-1997:1 Pakistarn 12.79% 10.86% 1960:1-1997:1 10.62% Thailand 1976:1-1998:1 Malawi 17.62% 20.80% 1981:1-1997:1 12.01% Zimbabwe 13.49% 1968:1-1992:1 15.89% 12.90% Solomon Islands 1981:1-1998:1 1979:1-1998:1 Western Samoa Venezuela 28.47% 28.92% 1984:1-1998:1 34 Section a Intercept Section b. Money growth rate Estimated long-term interest rate Section c. A 1% increase in money growth rate should increase the long term interest rate by