Question

A4 Assignment Eight The US government and the Federal Reserve is a great source for economic data. The Federal Reserve site below will allow you to create graphs using data from the government. Create a graph that includes a measure of money such as M1 or M2, consumer price index, unemployment rate and real gross domestic product over time. Put time on the horizontal axis of your graph and the other variables on the vertical axis. Use monthly data that covers a time period of at least five years, with 2018 as the most current year. Save your graph as a picture and insert into a Word file (.docx) and answer the following questions. According to your chart, • Was the growth in GDP increasing or decreasing when unemployment increased? • Was the growth in GDP increasing or decreasing when the consumer price index increased? When GDP was falling, was the money supply increasing or decreasing? • When the consumer price index was increasing was the money supply increasing or decreasing? Given your knowledge of economic theory, explain your findings from above. research.stlouisfed.org/fred2/ Once you enter the site above, look for the tabs about 1/3 of the way down the screen. Look for the Need Help tab. Click on it and then look for Graphs. You will find tutorials on how to create and share the graph. The easiest way to share the graph is to save it as a picture and insert it into the .doc or .docx documents you will be submitting as your assignment. This is where you will find the tools and instructions you need. There are links for the DATA and GRAPHS that will assist you in completing the assignment.

Answer 1

Answer:

Unemployment Rate (%) 3 4 5 6 7 01jul2013 Consumer Price Index (% Change) -.5 0. 5 1 01jul2013 01jul2014 01jul2014 01 jul2015 01jul2015 Date Date Emmann 01 jul2016 01jul2016 01jul2017 01jul2017 01jul2018 01jul2018 M1 (Billions $) Real GDP(Billions $) 2500 3500 4000 16500 17000 17500 18000 18500 19000 01 jul2013-1 01jul2013 01 jul2014 01jul2014 01jul2015 01jul2015 Date Date 01jul2016 01jul2016 01 jul2017 01jul2017 01jul2018 01jul2018

6 % Change 4 0 01jul2013 01jul2014 01jul2015 01jul2016 Date 01jul2017 01jul2018 M1 Growth Unemployment Rate (%) – Real GDP growth Consumer Price Index (% Change)

a) As we can see from the chart, real GDP growth declines with an increase in unemployment. For instance, between the last quarter of 2013 and first quarter of 2014, as unemployment rate increases, growth rate in real GDP slips below zero. As the economy employs lesser labour than before, production drops and that results in a contraction of total output. b) As the graphs represent the levels and change in real GDP, change in consumer prices does not affect the growth rate of GDP adjusted for constant prices. Hence, we cannot establish a relationship between real GDP growth and CPI. c) According to the theory of monetary neutrality, money supply growth should not affect real variables such as real GDP and unemployment. This maybe a good approximation in the long run, but in the shorter run wages & prices tend to be sticky. They can get affected by changes in money supply and cause a change in the level of employment or output. Hence, we cannot definitively establish a relationship between change in money supply and real GDP growth. d) Movement in Money Supply is mirrored by Movement in CPI. From the Quantity theory of money, we know that increase in money supply leads to an increase in price level and thus money supply growth is directly proportional to inflation.