Reference no: EM133132314

Go to the St. Louis Federal Reserve FRED data base and find data on the M2 money supply (M2SL) and the 7-year U.S. Treasury bond (GS7) and the 20 Year US Treasury Security (GS20). For the M2 money supply indicator, adjust the units setting to "Percent Change from Year Ago" and change the frequency to quarterly. For the 7 and 20 -Year Treasury Security, adjust the frequency setting to "Quarterly." Download the data into Excel.

Create a scatter plot, with money growth on the horizontal axis and the 7-year Treasury rate on the vertical axis, from 1990 Q1 to 2020 Q1. On the scatter plot, graph a trendline (regression) line, the equation of the trendline and R2 of the data. Based on the fitted line and statistical infrmation, are the data consistent with the liquidity effect? Briefly explain.

Repeat part (a), but this time compare the contemporaneous money growth rate with the 7 Year Treasury Security interest rate four quarters forward. For example, create a scatter plot comparing money growth from 1990 Q1 with the interest rate from 1991 Q1, and so on, up to the most recent pairwise data available. As in part a, construct the scatterplot, trendline/regression line and R . Compare your results to those obtained in part (a) and interpret the liquidity effect as it relates to the income, price-level, and expected inflation effects.

Create a scatter plot, with money growth on the horizontal axis and the 20-year Treasury Security rate on the vertical axis, from 1990 Q1 to 2020 Q1. Construct the scatter plot, graph a fitted (regression) line (trendline) of the data and R. Based on the fitted line and statistics are the data consistent with the liquidity effect? Briefly explain.

Repeat part (c), but this time compare the contemporaneous money growth rate with the 20 Year Treasury Security interest rate four quarters later. For example, create a scatter plot comparing money growth from 1990 Q1 with the interest rate from 1991 Q1, and so on, up to the most recent pairwise data available. Construct the scatter plot, graph a fitted (regression) line (trendline) of the data and R . Compare your results to those obtained in part (c). Interpret the liquidity effect as it relates to the income, price-level, and expected inflation effects.

Based on your answers to parts (a) through (d), how does the actual data on money growth and interest rates compare to the two scenarios (7 Year and 20 Year Treasury Securities) presented in Figure 11 of this chapter? Explain with respect to both the 7 year Treasury Security rate and the 20 year Treasury Security rate.

Given your empirical results above does the growth rate of M2 (%ΔM2) have a stronger influence on the seven year Treasury Security rate or the twenty year Treasury Security rate. Explain.