Reference no: EM13371049

You work at the Bank of Eureka to help customers, including retired people, to plan for the future.  Often the value of pensions does not keep up with inflation.  Hence retired people need a forecast of inflation.  One of the assertions is that changes in Federal Reserve policy can affect inflation.

 You are given data on money and inflation. Money = average annual growth over 5 year periods, and inflation is average annual rate of inflation over 5 year periods.

Period Ending               Money                          Inflation

1965                             9                                  1.6

1970                             7.9                                4.2

1975                             11.5                              8

1980                             12                                 10.5

1985                             11                                 7

1990                             7                                  4.9

1995                             2.8                                3.8

2000                             7.1                                3

2005                             10.1                              2.7

      Do the data support a connection between the rate of increase in the money supply and inflation?  Using the data on the growth rate of Money and inflation, run a regression of the rate of inflation on the rate of growth of the money supply.

(1)   Interpret slope (What does the coefficient on the money supply variable tell you)?

(2)   Forecast inflation if money =   8

(3)   What is the meaning of the p-value? Is the regression coefficient significant?

(4)   Interpret the coefficient of determination

(5)   Is faster money growth always associated with higher inflation?