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Go to the St. Louis Federal Reserve FRED database, and find data on the M1 Money Stock (M1SL), M1 Money Velocity (M1V), and Real GDP (GDPC1). Convert the M1SL data series to 鈥渜uarterly鈥� using the frequency setting, and for all three series, use the 鈥淧ercent Change from Year Ago鈥� setting for units.

a. Calculate the average percentage change in real GDP, the M1 money stock, and velocity since 2000:Q1.

b. Based on your answer to part (a), calculate the average inflation rate since 2000 as predicted by the quantity theory of money.

c. Next, find the data on the GDP deflator price index (GDPDEF), download the data using the 鈥淧ercent Change from Year Ago鈥� setting, and calculate the average inflation rate since 2000:Q1. Comment on the value relative to your answer in part (b).

Step by step solution

01

Step 1. Introduction

GDP is a measure of the economic growth of a country. It refers to the total value of final goods and services produced. The real GDP is an inflation-adjusted measure of GDP. The velocity of money refers to the number of times money changes hands.

02

Step 2. Explanation Part (a)

observation_date	M1SL_PC1	M1V_PC1	GDPC1_PC1
2000-01-01	1.4	4.8	4.2
2000-04-01	0.5	7.0	5.2
2000-07-01	0.3	6.2	4.0
2000-10-01	-1.7	7.2	2.9
2001-01-01	-0.9	5.7	2.2
2001-04-01	1.2	2.2	1.0
2001-07-01	5.8	-2.9	0.5
2001-10-01	7.3	-4.8	0.2
2002-01-01	8.1	-4.7	1.3
2002-04-01	6.2	-3.3	1.3
2002-07-01	2.5	1.1	2.1
2002-10-01	3.2	0.5	2.0
2003-01-01	3.6	0.0	1.7
2003-04-01	6.5	-2.4	2.0
2003-07-01	8.3	-2.8	3.2
2003-10-01	7.4	-0.9	4.3
2004-01-01	6.8	-0.1	4.4
2004-04-01	5.5	1.5	4.2
2004-07-01	4.5	1.8	3.5
2004-10-01	5.4	1.0	3.4
2005-01-01	3.9	3.1	3.9
2005-04-01	2.4	4.2	3.6
2005-07-01	1.7	5.0	3.4
2005-10-01	0.4	6.0	3.0
2006-01-01	0.8	5.7	3.2
2006-04-01	1.0	5.4	3.0
2006-07-01	-0.4	6.0	2.3
2006-10-01	-0.5	5.9	2.6
2007-01-01	-1.0	5.6	1.5
2007-04-01	-0.4	5.1	1.9
2007-07-01	0.4	4.6	2.4
2007-10-01	0.4	4.4	2.2
2008-01-01	1.1	2.3	1.4
2008-04-01	1.5	1.7	1.4
2008-07-01	4.0	-1.7	0.2
2008-10-01	11.3	-10.8	-2.5
2009-01-01	14.0	-13.9	-3.3
2009-04-01	16.7	-17.1	-4.0
2009-07-01	16.2	-16.6	-3.1
2009-10-01	10.1	-8.9	0.1
2010-01-01	7.6	-4.9	1.8
2010-04-01	5.2	-1.0	2.9
2010-07-01	5.0	-0.2	3.3
2010-10-01	7.8	-3.0	2.8
2011-01-01	10.4	-5.8	2.0
2011-04-01	12.9	-8.0	1.7
2011-07-01	18.9	-13.1	0.9
2011-10-01	18.9	-13.0	1.5
2012-01-01	18.2	-11.5	2.6
2012-04-01	16.7	-10.9	2.4
2012-07-01	13.2	-7.8	2.6
2012-10-01	13.1	-8.2	1.6
2013-01-01	11.9	-7.5	1.6
2013-04-01	11.7	-7.7	1.3
2013-07-01	8.9	-4.9	1.9
2013-10-01	8.2	-3.6	2.5
2014-01-01	10.1	-6.4	1.3
2014-04-01	11.0	-5.7	2.5
2014-07-01	10.8	-5.3	2.8
2014-10-01	9.8	-5.2	2.6
2015-01-01	9.4	-4.1	3.8
2015-04-01	7.3	-2.8	3.0
2015-07-01	7.1	-3.7	2.2
2015-10-01	5.7	-2.9	1.9
2016-01-01	4.9	-2.4	1.6
2016-04-01	7.6	-4.8	1.4
2016-07-01	8.5	-5.4	1.6
2016-10-01	9.1	-5.1	2.0
2017-01-01	9.2	-4.9	1.9
2017-04-01	8.4	-4.1	2.1
2017-07-01	8.2	-3.7	2.3
2017-10-01	8.2	-3.1	2.7
2018-01-01	6.8	-1.6	3.0
2018-04-01	4.4	1.6	3.3
2018-07-01	3.4	2.2	3.1
2018-10-01	3.2	1.4	2.3
2019-01-01	2.9	1.2	2.2
2019-04-01	3.9	0.1	2.1
2019-07-01	4.9	-0.7	2.3
2019-10-01	6.3	-1.9	2.6
2020-01-01	9.0	-6.2	0.6
2020-04-01	230.1	-72.4	-9.1
2020-07-01	337.5	-77.6	-2.9
2020-10-01	344.0	-77.7	-2.3
2021-01-01	349.6	-77.1	0.5
2021-04-01	53.0	-23.5	12.2
2021-07-01	16.4	-5.4	4.9
2021-10-01	15.1	-3.0	5.6
Average	21.4	-5.8	2.0

So, from the above table, it is evident that the average percentage change in money supply is 21.4%, for velocity of money supply it is -5.8% and for real GDP it is 2%.

03

Step 2. Explanation Part (b)

The average inflation rate can be obtained using the quantity theory formula:

$$\begin{gathered} \mathrm{Inflation} \\ =\%鈭�\mathrm{M}+\%鈭�\mathrm{V}-\%鈭�\mathrm{Y} \\ =21.4-5.8-2 \\ =13.6 \end{gathered}$$

04

Step 4. Explanation Part (c)

observation_date	GDPDEF_PC1
2000-01-01	2.0
2000-04-01	2.2
2000-07-01	2.4
2000-10-01	2.4
2001-01-01	2.4
2001-04-01	2.4
2001-07-01	2.2
2001-10-01	2.0
2002-01-01	1.6
2002-04-01	1.4
2002-07-01	1.5
2002-10-01	1.7
2003-01-01	1.9
2003-04-01	1.9
2003-07-01	2.0
2003-10-01	2.0
2004-01-01	2.3
2004-04-01	2.7
2004-07-01	2.8
2004-10-01	3.0
2005-01-01	3.0
2005-04-01	3.0
2005-07-01	3.2
2005-10-01	3.3
2006-01-01	3.2
2006-04-01	3.4
2006-07-01	3.1
2006-10-01	2.7
2007-01-01	2.9
2007-04-01	2.7
2007-07-01	2.5
2007-10-01	2.6
2008-01-01	2.0
2008-04-01	1.8
2008-07-01	2.1
2008-10-01	1.9
2009-01-01	1.5
2009-04-01	0.8
2009-07-01	0.1
2009-10-01	0.2
2010-01-01	0.5
2010-04-01	1.2
2010-07-01	1.4
2010-10-01	1.7
2011-01-01	1.9
2011-04-01	2.1
2011-07-01	2.4
2011-10-01	1.9
2012-01-01	2.0
2012-04-01	1.8
2012-07-01	1.7
2012-10-01	2.1
2013-01-01	1.8
2013-04-01	1.7
2013-07-01	1.7
2013-10-01	1.8
2014-01-01	1.8
2014-04-01	2.1
2014-07-01	2.0
2014-10-01	1.6
2015-01-01	1.1
2015-04-01	1.1
2015-07-01	1.0
2015-10-01	0.8
2016-01-01	0.8
2016-04-01	0.9
2016-07-01	0.9
2016-10-01	1.4
2017-01-01	2.0
2017-04-01	1.6
2017-07-01	1.9
2017-10-01	2.1
2018-01-01	2.1
2018-04-01	2.7
2018-07-01	2.5
2018-10-01	2.3
2019-01-01	2.1
2019-04-01	1.7
2019-07-01	1.7
2019-10-01	1.6
2020-01-01	1.6
2020-04-01	0.6
2020-07-01	1.2
2020-10-01	1.3
2021-01-01	2.0
2021-04-01	4.0
2021-07-01	4.6
2021-10-01	5.9
Average	2.0

It is evident from the above table that the average percentage change in the GDP deflator is 2%.

There is an huge gap between the inflation calculated through quantity theory and rate calcuated through GDP deflator.

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