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Q. 1. How does the forecast for 2006 compare with the historical performance of the economy? The spreadsheet Bank of Green, 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 Green? 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 p-value? Is the regression coefficient significant? Is faster money growth always associated with higher inflation?
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