Table 2 9 gives data on the Consumer Price Index (CPI) for all items (1982 1984 100) and the Standard Poor 's (S P) index of 500 common stock prices (base of index 1941 1943 10) CONSUMER PRICE INDEX (CPI) AND S P 500 INDEX (S P), UNITED STATES, 1978 1989 a Plot the data on a scatter gram with the S...

a b The scatter gram will show that the relationship b ...

Table 2-9 gives data on the Consumer Price Index (CPI) for all items (1982-1984 = 100) and

Question:

Table 2-9 gives data on the Consumer Price Index (CPI) for all items (1982-1984 = 100) and the Standard & Poor's (S&P) index of 500 prices (base of index: 1941-1943 = 10).
CONSUMER PRICE INDEX (CPI) AND S&P
500 INDEX (S&P), UNITED STATES, 1978-1989

a. Plot the data on a scatter gram with the S&P index on the vertical axis and CPI on the horizontal axis.
b. What can you say about the relationship between the two indexes? What does economic theory have to say about this relationship?
c. Consider the following regression model:
(S&P)t = B1 + B2CPIt + ut
Use the method of least squares to estimate this equation from the preceding data and interpret your results.
d. Do the results obtained in part (c) make economic sense?
e. Do you know why the S&P index dropped in 1988?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...