Question 1
1. Make me a list of eight or more things that are supposed to be cause and effect
represented in the data. For example: changes in interest rates cause changes in
investment.
A good list of cause and effect would:
1. Changes in aggregate supply of money. When this occurs, money supply will be
reduced the demand of money which causes the lowering of interest rates.
2. The increments to the government deficit will cause a reduction in income in the
economy and a devaluing of GDP.
3. The equation of GDP being equal to consumer spending, business investments,
and government spending. When Investment decreases, it causes people to save
and real GDP will decrease
4. Investment and Interest rate are inversely related, if the interest rate increases it
will decrease investment, as has been shown on the IS curve
5. The risk of inflation has a cause and effect with the money supply in an increase
in interest rate and income
6. Workers real wage and real GDP relationship growth. GDP measures wages,
profit, rent, interest and wages, and even if GDP would rise if wages, profit, rent
and interest are much hire it can have a negative effect on wages to decline 7. Money supply increase relationship with the real wage. If money supply price
level declines then real wage price index will be affected
8. A rise in income will increase investment, resulting in a decrease in budget deficit
and increase money demand and money supply Question 2
1. Run a set of correlation coefficients. If the "data analysis" doesn't appear under "data" in
excel, go to file, options, add-ins, and add the analysis toolpak. What is really correlated
with what? The real correlations are described below: A negative correlation between the change in money supply and change in the interest
rate ( r = - 0.40512) A positive correlation between the inflation rate and change in the interest rate (r =
575626) A positive correlation between the change in real output (income) level and change in the
investment (r = 0.875454) A negative correlation between the change in real wages and inflation rate (r = -0.48794) A negative correlation between the change in real output (income) level and federal
deficit as a percentage of GDP (r = 0.262883) Question 3
1. Take Ch-r (change in interest rates). For everything else compared with this, are the
correlation signs (Positive v. Negative) what you would expect? (You should have six
yes or no answers). Pick one other than Ch-M1 and explain you’re no or yes. The correlation calculated between inflation rate and change in interest rate is a positive
correlation. Basically inflation rate occurs and shots high when too few goods are being
chased by too much money. When it is sticky it becomes a great problem to the central
bank; however this happens when there is a loop feedback between prices and wages. When inflation rates begin to become a threat the central bank raises the interest rates to
take care of the inflation rate.
1) There is a strong positive correlation of 0.09 percent that Column B and D are closely
related and .86 percent of the linear variation can be explained.
2) There is a strong positive correlation of 013 percent that column C and D are closely
related and .15 percent of the linear variation can be explained.
3) There is a small positive correlation of -0.41 percent that column D and E are closely
related and .16 percent of the linear variation can be explained.
4) There is a weak positive correlation of 0.28 percent that column D and F are closely
related and .080 percent of the linear variation can be explained.
5) There is a strong positive correlation of -0.22 percent that column D and G are closely
related and -048 percent of the linear variation can be explained.
6) There is a strong positive correlation of 0.57 percent that column D and H are closely
related and 0.32 percent of the linear variation can be explained. ` By the analysis above we can conclude that there is a strong positive correlation between
changing interest rate and inflation.
Question 4
1. Compare the change in the money supply with Ch-Y, Ch-P, and Ch-r. Explain what the
correlations are telling you. When there is a strong money supply it tends to lower the interest rate. Which makes
sense in the strong negative relationship between change in money supply and change in
the interest rate? (r = -0.40) When you look at the rest of the relationships you notice negative and fairly weak
relationship between a weak money supply and real output. (r= -0.17) Last insignificant relationship which is negative is noticeable between money supply and
inflation rate (r= -0.10) Question 5
As an economist, how valid is making the comparisons we've just made?
I believe that these comparisons are very valid when trying to understand which way the
economy is at the moment and what is the best solution to keep it at a steady pace of
growth, avoid in inflation, and lower unemployment. For example on the change investment
and change in real GDP can mean that we could be experiencing a high growth in the
economy. Investment and Interest rate, having a low/correlation, would mean that there is no
cause and effect as far as people trying not to invest in the economy such as opening up new
loans, house, cars and other things having to deal with investment and interest rates. At parts
where this does matter is at instances of high correlation such as with federal deficit and
change in money supply. As we have read in our textbook this correlates with the US big
economic woes towards exports and how we spent a lot more. This can also tell us in the
long-run where our economy will take us.
Now on question 3 where we compare almost all the between the variables to others we can see
different types of correlations and which theories these are leading us on towards coming up in a sustainable conclusion. Such as column B and D can tell us that a strong correlation will give us
a straight line meaning it is slowly going up and increasing at a pace of 9%. With the 86%
variation explained we can be more than certain on making predictions on our analysis.
However, just because this maybe proven doesn't mean we should disregard old theories of
where to implement policy. The linear variation explained in column B and D brings out a strong
variation in the comparisons. The correlation is a strong correlation offering strong variations
thus the variation is strong.
One of the important correlations we can see in changing interest rates and inflation. As an
economist we must always be weary of inflation rates and keeping it down and when to change
interest rates in order to prevent it from going up any more. The variations of the comparison is a
great deal to an economist since it helps one to know the state of inflation and on whether to
carry out the changes. Our biggest reminder is the great depression and how aggregate demand
could have been a caused by of inflation, or as the classical argument caused by a sudden fall in
the money supply and a leftward shift in the labor supply curve. As an example, if interest rates decrease it will encourage investment which makes sense with
the inflation rate at 0.10% on question 3. In the last point of changing money supply and
changing interest rates could mean that prices are being sticky and would mean that money is not
going as fast as it can be. As far as money supply and low interest rates supports the theory that
wages are sticky and people are saving a lot more rather than consuming. Perhaps it may mean
that people are saving it more and would support the money supply and real output. IF, it was a
strong correlation. Since its not it means that inflation is down. If we take into consideration (A
positive correlation between the change in real output (income) level and change in the investment (r = 0.875454)) it could mean that it is not one of the causes of the above statements
causing people not to save if there is still strong output.
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