The text Web site contains data from the Bernanke-Kuttner paper on the Fed and the stock market. The data cover 68 days from 1995 through 2002 when the Fed either changed interest rates or decided not to change them. For each of these days, the data include the change in a short-term interest rate and the percentage change in stock prices. The data also include the interest-rate change that participants in financial markets expected before the Fed acted.
a. Make a graph with the change in the interest rate on the horizontal axis and the percentage change in stock prices on the vertical axis. Plot a point for each day in the data set.
b. Now compute the unexpected change in the interest rate—the actual change minus the expected change. Redo the graph in part (a) with this variable on the horizontal axis.
c. Which has a stronger effect on stock prices, the change in the interest rate or the unexpected change? Explain your finding.