Posted: November 30th, 2016
Sitting down in your office, coffee in hand, you jot down some questions you think might come up during the day’s discussions. Prepare a report, using the report guidelines from the course website, which incorporates the answers to these questions. Q. 1. How does the forecast for 2006 compare with the historical performance of the economy? The spreadsheet Bank of Trust, found on the course website, provides quarterly data for nominal and real GDP. Use this data set to compare the projected quarterly growth rates of the economy during 2006 with the average since 1990 (which measure of GDP do you want to use?). Does this explain why investors are concerned? Determine the rate of inflation expected for 2006. Q. 2. Investors are expecting the Federal Reserve to take action. Discuss the strategy you expect the Federal Reserve to follow and broadly what you predict it will do. You would want to analyze the strategy using aggregate demand-aggregate supply. Of course, you also want to be able to answer the question using less technical language. Q. 3. The Federal Reserve’s strategy will require changing the money supply. How does the Federal Reserve do this, and how (and why) does this affect interest rates? Q. 4. If the Federal Reserve decides to act, how will that affect investors that deal with Bank of Trust? Limit your answer to issues discussed in the case. Q. 5. One of the assertions is that changes in Federal Reserve policy can affect inflation. Do the data support a connection between the rate of increase in the money supply and inflation? Using the data on the growth rate of M2 and inflation in your spreadsheet, run a regression of the rate of inflation on the rate of growth of the money supply. What does the coefficient on the money supply variable tell you? What is the meaning of the pvalue? Is the regression coefficient significant? Is faster money growth always associated with higher inflation?
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