Using the FRED database, construct a graph containing two data series, one for real GDP (“GDPC1”) and another for real government consumption and investment expenditures (“GCEC96”). Use the “Add Data Series” option to add a second variable to your graph. Also, under “Edit Data Series” for the government purchases variable, select the “Right” box for “Y Axis Position” so that the two series will be plotted close together. Then complete the following exercises:
(a) Display the graph for the period 2004 to the present.
(b) How did government purchases and real GDP co-move during and after the Great Recession?
(c) Provide two alternative (and conflicting!) interpretations of these data, one suggesting that the rise in government purchases had a negative effect on the economy, and the other suggesting it had a positive effect.
(d) Why is it difficult to determine which of these stories is most appropriate?