Question 3: Use the data given in Lecture 6 data file, sheet named EX Q3. The data on GNP and four definitions of the money stock for the United States for 13701333. The same data is given here: Money Stock Measure, Shilliun GNP Year {hillianS) M1 M2 M3 L 1970 992.7 216.6 628.2 677.5 816.3 1971 1,077.60 230.3 712.8 776.2 903.1 1972 1,185.90 252 805.2 886 1,023.00 1973 1,3 26.40 265.9 861 985 1,141.70 1974 1,434.20 277.6 908.5 1,070.50 1,249.30 1975 1,549.20 291.2 1,023.30 1,174.20 1,367.90 1976 1,713.00 310.4 1,163.60 1,311.90 1,516.60 1977 1,913.30 335.4 1,286.70 1,472.90 1,704.70 1978 2,163.90 363.1 1,389.10 1,647.10 1,910.60 1979 2,417.80 389.1 1,498.50 1,804.80 2,117.10 1930 2,631.70 414.9 1,632.60 1,990.00 2,326.20 1931 2,9 57.80 441.9 1,796.60 2,238.20 2,599.80 1932 3,069.30 480.5 1,965.40 2,462.50 2,370.80 1933 3,304.80 525.4 2,196.30 2,710.40 3,183.10 Where: M1 = Currency 4- Demand deposits 4- Travelers checks and other checkabfe deposits (OCDs). M2 = M1 + Overnight RPs and Eurodollars + MMMF (Money market mutual fund) balances + MMDAS {Money market deposit accounts) 4- Savings and small deposits. M5 = M2 + Large time deposits + Term RPS + institutional MMMF. L = M3 + Other liquid assets. Page 2 of 5 Regressing GNP on the various definitions of money. we obtain the following results: The numbers in the brackets represent the standard errors of the parameters. 1. GNP, = 737.4723 + 3.0353 M1, ,r2 = 0.9912 (77.9554) (0.2197) 2. GNP, = 44.0525 + 1.5375 102,42 = 0.9905 (51.0134) (0.0443) 5. GNP, = 159.1355 + 1.2034 M3,;2 = 0.9943 (42.9352) (0.0252) 4. GNP, = 154.2071 + 1.0290 1., ,r2 = 0.9933 (44.7553) (0.0234) The monetarists or quantity theorists maintain that nominal income (i.e.. nominal GNP) is largely determined by changes in the quantity or the stock of money. although there is no consensus as to the "right" definition of money. Given the results in the preceding table, consider these questions: a. which definition of money seems to be closely related to nominal GNP? b. Since the r2 terms are uniformly high, does this fact mean that our choice for definition of money does not matter? c. if the Fed wants to control the money supply, which one of these money measures is a better target for that purpose? Can you tell from the regression results? d. At 5% level of confidence, test the hypothesis that the slope parameter for each model is less than 1.5. Comment on the findings.