Table 5.6 gives data on GNP and four definitions of the money stock for the United States

Question:

Table 5.6 gives data on GNP and four definitions of the money stock for the United States for 1970€“1983. Regressing GNP on the various definitions of money, we obtain the results shown in Table 5.7.

Table 5.6

Money Stock Measure, $ billion GNP $ billion M1 Мз Year M2 628.2 712.8 1970 677.5 992.70 216.6 816.3 1971 1,077.6 1,18

Table 5.7

-787.4723 + 8.0863 M1t (77.9664) (0.2197) r² = 0.9912 1) GNP: -44.0626 + 1.5875 M2t (61.0134) (0.0448) r² = 0.9905 2)

The monetarists or quantity theorists maintain that nominal income (i.e., nominal GNP) is largely determined by changes in the quantity or the stock of money, although there is no consensus as to the €œright€ definition of money. Given the results in the preceding table, consider these questions:

a. Which definition of money seems to be closely related to nominal GNP?
b. Since the r² terms are uniformly high, does this fact mean that our choice for definition of money does not matter?
c. If the Fed wants to control the money supply, which one of these money measures is a better target for that purpose? Can you tell from the regression results?