Go to the St. Louis Federal Reserve FRED database, and find data on real GDP (GDPC1), the labor force (CLF16OV), and a measure of the capital stock, real consumption of fixed capital (A262RX1Q020SBEA). Download all of the data onto a spreadsheet. For (CLF16OV), change the frequency setting to “Quarterly” before downloading. For each quarter, calculate the Solow residual; then, using those values, calculate the percentage change in the Solow residual and real GDP from the previous quarter. Multiply these numbers by 4 to annualize the quarterly numbers.

a) For the most recent quarter of data available, what is the growth rate of real GDP? How does it compare to the Solow residual growth rate?

b) When was the last time this measure of the Solow residual growth rate was negative? How did it compare with GDP growth?

c) Use the “ = correl()” function to calculate the correlation coefficient between GDP growth and Solow residual growth over the most recent five years of data.

d) Do your calculations support or refute the real business cycle model? Briefly explain.