Discuss the potential relationship between government deficits and inflation. In this question, you will investigate the data
Question:
Discuss the potential relationship between government deficits and inflation. In this question, you will investigate the data on government debt as a share of GDP and the monetary base as a share of GDP. First, find data on the amount of U.S. Federal government debt held by the public as a share of GDP. Then find data on the monetary base and divide it by GDP, noting that the monetary base is available at a monthly frequency and GDP is available at a quarterly frequency, so you will need to create a quarterly series for the monetary base. One way to create such a quarterly series is to compute quarterly averages of the monthly monetary base series. (FRED does this automatically.) Plot the debt-to-GDP data and the monetary base-to-GDP data on the same graph. Does there appear to be a relationship between the two variables? How did the relationship change in the Great Recession of 2007-2009? Can you explain this change, given what you learned about the financial crisis?
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