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Traditionally, the most important measure of the U.S. money supply (for the purpose of providing information to the Federal Reserve on how it ought to conduct monetary policy) has been M2

Traditionally, the most important measure of the U.S. money supply (for the purpose of providing information to the Federal Reserve on how it ought to conduct monetary policy) has been M2
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ECONOMICS

2. Traditionally, the most important measure of the U.S. money supply (for the purpose of providing information to the Federal Reserve on how it ought to conduct monetary policy) has been M2. The rationale is that M2 bears the closest long-term relationship with overall economic activity measured by nominal GDP (i.e., total expenditures on goods and services produced inside the United States). The ratio of nominal GDP to M2 is referred to as the “velocity” of M2 to capture how many times each dollar is spent (“turns over”) on average during the year.

a) Visit the U.S. Commerce Department’s Web site for its Bureau of Economic Analysis at bea.gov/bea/dn/gpdlev.xls and extract the annual data for “GDP in billions of current dollars” for the past 20 years.
b) Go to the Federal Reserve’s web site at federalreserve.gov/releases and extract the data for M2 for the last month of the past 20 years from Table 1 of the H 6 release.
c) Using the data from parts (a) and (b) construct a time series for the “velocity” of M2 over the past 20 years and produce a graph of M2 velocity versus time. Does this ratio appear of economic activity that the Federal Reserve could use? If not, when does it appear to have been reliable and when does it appear to have gone awry? Can you explain why?

 

FILE: MS WORD

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