Go to the St. Louis Federal Reserve FRED database, and find data on the budget deficit (FYFSD), the amount of federal debt held by the public (FYGFDPUN), and the amount of federal debt held by the Federal Reserve (FDHBFRBN). Convert the two “debt held” series to “Annual” using the frequency setting. Download all three series into a spreadsheet.

Make sure that the rows of data align properly with the correct dates. Note that for the deficit series, a negative number indicates a deficit; multiply the series by –1 so that a deficit is indicated by a positive number.

Convert the three series so that all data are given in terms of the same units (either millions or billions of dollars). To do this, if a series is in millions and you are converting it to billions, divide the series by 1000. Finally, for each year, convert the two “debt held”

series into one “changes in debt holdings by the public and the Federal Reserve” series by taking, for each year, the difference in bond holdings from the preceding year.

a) Create a scatter plot showing the deficit on the horizontal axis and the change in bond holdings by the public on the vertical axis, using data from 1980 to the most recent period. Insert a fitted line into the scatter plot, and comment on the relationship between the deficit and the change in public bond holdings.

b) Create a scatter plot showing the deficit on the horizontal axis and the change in bond holdings by the Federal Reserve on the vertical axis, using data from 1980 to the most recent period.

Insert a fitted line into the scatter plot, and comment on the relationship between the deficit and the change in Federal Reserve bond holdings.

c) Based on your results in parts (a) and (b), comment on how, if at all, the monetizing of the debt is exhibited in the data.

Do you think the relationship between the deficit and the change in bond holdings of the Federal Reserve has changed since 2008? Why or why not?