What does theory suggest about the likely short-run

Reference no: EM133707398

Question: MONEY, PRICES and income (1) Plot the annual rate of inflation (use the GDP deflator) against the annual rate of money supply growth. Comment on the observed relationship in light of theory. (2) Do the same thing as in (1) but use 3-year moving averages of both series instead of the yearly observations. Comment on this relationship and on the difference between it and the previous relationship. The following table contains averages of the data for two subperiods. All figures are in percent. per annum terms. M P y 1970-85 15.7 13.8 2.9 1986-98 6.5 5.3 1.9 (3) What happened to average rates of real income growth and k growth in these two time periods? Use the quantity equation to solve for these two figures. (4) Use the quantity equation to explain the patterns in the data. (5) The decline in money supply growth began with a sharp deceleration in 1980. What does theory suggest about the likely short-run effect on real income growth following this change? Do we observe such an effect in the data?

Reference no: EM133707398

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