Economics Assignment: Intermediate Macroeconomic Theory

Demonstrate your understanding of an economic model and your ability to apply the model to real world data.

This project will be using actual data for the U.S. economy to evaluate the Quantity Theory of Money and use it to estimate future changes in the economy.

Begin by reviewing the quantity theory of money in your text. Write a one page summary of the quantity theory emphasizing key assumptions and implications of the model.

You will be using date from the FRED database maintained by the Federal Reserve Bank of St. Louis.

At the top of the web page you will find a search box. Search for GDPDEF (GDP Deflator). You will be taken to a page with a selection of data bases. Select GDPDEF and click on the "add to graph" option.You should now be on a page with a graph of real GDP from 1959 to the most recent quarter. Take a moment and examine the graph. Placing your cursor over the graph will show the actual data represented.

Now click on the "edit graph" button found in the upper right part of the screen. This opens a table that will let you modify the data in the graph. First, change the frequency of the data to annual using the average aggregation method. Then, under units, change the data to percentage change from one year ago. Note how your graph has changed.

Repeat the process two more times for the M2 money stock (M2SL) and real GDP (GDPC1). Be sure to click Add Line at the top of the page for each new series. The data will automatically be converted to a percentage change, but you will have to manually put the data into annual numbers. Now click on the X in the upper right-hand portion of the editing table to close the table. Using the date range selector chose January 1960 as the beginning date for your selected data. Take a moment to examine your graph and how the three data sets relate to each other. Then click on the download button and download the data to an EXCEL spreadsheet.Open the EXCEL file and save it.

In your EXCEL file, create a column for estimated inflation. To calculate this column, use the percentage change version of the equation of exchange.Next, create a column labeled deviation from true. To calculate this column, subtract the estimated rate of inflation from the actual rate of inflation shown in your GDPDEF column.

At this point you can compare the prediction of the model to the actual data. Write a one page analysis describing how well you think the model performed in estimating the rate of inflation. If you believe it did not perform well, offer an explanation for why you think the model's predictions were off. What criticisms of this experiment might a monetarist offer?Be sure to include a copy of your EXCEL table with your paper.