Problem
Use the St. Louis Federal Reserve FRED database (at https://fred.stlousfed.org) find the data on narrow money supply (M1) [M1SL]and Broad money supply (M2)[M2SL], the consumer price index(CPIAUCSL) and the 10-year US treasury bond rate. For the data series, adjust the units setting to "percentage change from year ago" and for the 10-year treasury bond, adjust the frequency setting to "Quarterly". Download the data into a spreadsheet and do the following:
A. Create a scatter plot for the period starting from 2000: to 2022.
B. From the scatter plot, set the trend line by fitting a linear regression line to the data.
C. Does the data support the quantity theory of money? Briefly explain.
D. Examine the impact of lag growth in money supply to inflation outcome by setting the M1 and M2 with four quarters lags. Exercise.
E. Use the M1, M2, and GDP data(GDPC1) in levels of $billion, use the 2000 to 2021 year range, use the "annual" setting, transform into logarithm form to measure average growth rate of M1 and M2, and inflation rate from the CPI for the same time period. On the basis of your estimates, briefly explain if the quantity theory of money holds.