Questions 4 (Each 4 points) The study of the link between inflation and the supply of...

 

Transcribed Image Text:

Questions 4 (Each 4 points) The study of the link between inflation and the supply of money has a long history. According to one theory, inflation is closely tied to the rate of money growth as well as the rate at which output grows. Consider the following equation that models this relationship: = INFẞ1+ B2GM + ẞ3GX + e Here, INF= rate of inflation (%), GM= rate of growth of the money supply (%), and GX= rate of growth real GDP (%). The file money.dta contains data on these variables for a sample of 76 countries and is taken from a study by Harold J. Brumm (2005), Money Growth, Output Growth, and Inflation: A Reexamination of the Modern Quantity Theory's Linchpin Prediction. 1. Plot INF against GM and GX separately. 2. According to the quantity theory, B₂ = 1, and ẞ3 = -1. Conduct F test to assess whether the evidence supports these restrictions by Stata. Comment on it (1 sentence) 3. How would you test the restriction ẞ2 + ẞ3 = 0 by rewriting the model. Estimate the new model and present your main results. Then test whether this restriction is supported at the 5% level of significance. Comment on it (1 sentence) Questions 4 (Each 4 points) The study of the link between inflation and the supply of money has a long history. According to one theory, inflation is closely tied to the rate of money growth as well as the rate at which output grows. Consider the following equation that models this relationship: = INFẞ1+ B2GM + ẞ3GX + e Here, INF= rate of inflation (%), GM= rate of growth of the money supply (%), and GX= rate of growth real GDP (%). The file money.dta contains data on these variables for a sample of 76 countries and is taken from a study by Harold J. Brumm (2005), Money Growth, Output Growth, and Inflation: A Reexamination of the Modern Quantity Theory's Linchpin Prediction. 1. Plot INF against GM and GX separately. 2. According to the quantity theory, B₂ = 1, and ẞ3 = -1. Conduct F test to assess whether the evidence supports these restrictions by Stata. Comment on it (1 sentence) 3. How would you test the restriction ẞ2 + ẞ3 = 0 by rewriting the model. Estimate the new model and present your main results. Then test whether this restriction is supported at the 5% level of significance. Comment on it (1 sentence)

Answer rating: 100% (QA)

Answer Here are the responses to each question 1 Plot INF against GM and GX separately stata use mon... View the full answer