LAPC The Relationship Between M2 & Inflation Statistical Analysis

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Properly discuss the relationship between the rate of increase in the money supply and inflation (using regression analyses). Properly discuss and explain the inflation on the rate of growth of the money supply (coefficient of determination, the nature of the relationship, the reliability of the results)? Properly discuss the results of the regression analysis using the applicable exhibit.

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FUTURE SECURITY BANK
You walk into the offices of Future Security Bank early in the morning on February 2nd, 2006. You are
employed by the bank to market proprietary financial products to moderate to high net worth customers.
Going into the break room to grab a cup of coffee, you flip on the TV to Bloomberg to catch the morning
financial news. The commentator says “… and the latest release shows that consumer confidence has
fallen for the second straight month. Given this, and the previous statistics on business inventories, it is
not surprising that investors are nervous. So, now, all eyes turn to the Fed”. You switch the TV off. It
looks like the economy is going to be the topic of discussion for the next week. More importantly, the
people you work with will expect you to know what is happening (and maybe explain it to them). It is
going to be a busy day.
Future Security Bank is a mid-tier regional bank, focused primarily on consumer and small business
lending. Historically the bank has funded its loans through traditional bank deposits. However, given the
rapid development in convenience of mutual funds and online investing, the bank has shifted its focus to
offering a larger range of financial products and advice to its high-end customers. This included offering
its own mutual funds, annuity and insurance products from other companies, and financial planning
courses.
Future Security Bank has a large staff dedicated to customer relations. Jobs range from handling
accounts to marketing consumers’ products to providing financial advice. Your job is to work with this
staff to determine what the best products are and how best to market them. You interact daily with
people from all over the bank, including some of the bank’s major customers (since they are a good
source of information on how the company is doing).
A large part of the bank’s customer base is retired individuals who have had long-term relationships with
the bank. These individuals have a range of financial expertise, some being dedicated followers of the
financial news, while others have never heard of the Federal Reserve.
The bank’s customers get their income from a variety of sources. Most have traditional bank accounts.
Some, particularly the middle age customers, have substantial holdings of stock. Retired investors also
typically have some sort of pension or retirement plan. The bank’s customers can be very concerned
about changes in the economy. Those holding stock are worried about corporate profitability; the more
profitable the company, the higher the value of the stock. Some of those with pensions have other
concerns. Often, the value of their pensions does not keep up with inflation. These investors tend to
watch for signs of future inflation that could mean they would have a lower real income in the years
ahead.
The growth of GDP seems to be slowing, leading many investors to be concerned about the future
prospects for the economy. One indicator of the weakness of the economy is the decline in consumer
confidence, a measure of how optimistic consumers are about the strength of the economy in the near
future. If this decline continues, it could lead to a decrease in consumer spending. Also, firms have spent
the last two years dramatically expanding their capacity by buying new machinery and building new
factories. Because of this, it is expected that companies are likely to rein in spending on investment over
the next year.
The Economic Research Group of Future Security Bank has provided historical data on GDP along with
forecasted values for the upcoming year (see the spreadsheet on the course website). The forecasts are
based on the information given above, but the forecasts also assume that the Federal Reserve will not
take action.
The Federal Open Market Committee (FOMC) of the Federal Reserve will be meeting in two weeks to
make a decision on monetary policy. The leading issue at that meeting will be the weakness in the
economy. Many of the members of the FOMC believe that the Federal Reserve should take immediate
action to counter the forecasted decline in the economy.
Required:
Sitting down in your office, coffee in hand, you jot down some questions you think might come up during
the day’s discussions. Prepare a report, using the report guidelines from the course website.
To prepare for this case, you may want to review macroeconomics LDC concepts 1, 5, 6, 7, 8,
and 9; and statistics concepts 4, 7 and 8.
Current-Dollar and “Real” Gross Domestic Product
Quarterly
(Seasonally adjusted annual rates)
GDP in
billions of GDP in billions
current
of chained
dollars
2000 dollars
1990q1
1990q2
1990q3
1990q4
1991q1
1991q2
1991q3
1991q4
1992q1
1992q2
1992q3
1992q4
1993q1
1993q2
1993q3
1993q4
1994q1
1994q2
1994q3
1994q4
1995q1
1995q2
1995q3
1995q4
1996q1
1996q2
1996q3
1996q4
1997q1
1997q2
1997q3
1997q4
1998q1
1998q2
5,716.4
5,797.7
5,849.4
5,848.8
5,888.0
5,964.3
6,035.6
6,095.8
6,196.1
6,290.1
6,380.5
6,484.3
6,542.7
6,612.1
6,674.6
6,800.2
6,911.0
7,030.6
7,115.1
7,232.2
7,298.3
7,337.7
7,432.1
7,522.5
7,624.1
7,776.6
7,866.2
8,000.4
8,113.8
8,250.4
8,381.9
8,471.2
8,586.7
8,657.9
7,112.1
7,130.3
7,130.8
7,076.9
7,040.8
7,086.5
7,120.7
7,154.1
7,228.2
7,297.9
7,369.5
7,450.7
7,459.7
7,497.5
7,536.0
7,637.4
7,715.1
7,815.7
7,859.5
7,951.6
7,973.7
7,988.0
8,053.1
8,112.0
8,169.2
8,303.1
8,372.7
8,470.6
8,536.1
8,665.8
8,773.7
8,838.4
8,936.2
8,995.3
1998q3
1998q4
1999q1
1999q2
1999q3
1999q4
2000q1
2000q2
2000q3
2000q4
2001q1
2001q2
2001q3
2001q4
2002q1
2002q2
2002q3
2002q4
2003q1
2003q2
2003q3
2003q4
2004q1
2004q2
2004q3
2004q4
2005q1
2005q2
2005q3
2005q4
2006q1
2006q2
2006q3
2006q4
8,789.5
8,953.8
9,066.6
9,174.1
9,313.5
9,519.5
9,629.4
9,822.8
9,862.1
9,953.6
10,021.5
10,128.9
10,135.1
10,226.3
10,333.3
10,426.6
10,527.4
10,591.1
10,717.0
10,844.6
11,087.4
11,236.0
11,457.1
11,666.1
11,818.8
11,995.2
12,198.8
12,378.0
12,605.7
12,766.1
13,037.4
12,550.2
12,247.8
12,053.1
9,098.9
9,237.1
9,315.5
9,392.6
9,502.2
9,671.1
9,695.6
9,847.9
9,836.6
9,887.7
9,875.6
9,905.9
9,871.1
9,910.0
9,977.3
10,031.6
10,090.7
10,095.8
10,138.6
10,230.4
10,410.9
10,502.6
10,612.5
10,704.1
10,808.9
10,897.1
10,999.3
11,089.2
11,202.3
11,248.3
11,394.7
10,786.2
10,333.5
10,125.3
Data on Money Growth and Inflation
Money is average annual growth rate of M2 over 5 year periods
Inflation is average annual rate of CPI over 5 year periods
Period Ending
1965
1970
1975
1980
1985
1990
1995
2000
2005
Money
9
7.9
11.5
12
11
7
2.8
7.1
10.1
Inflation
1.6
4.2
8
10.5
7
4.9
3.8
3
2.7

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Explanation & Answer:
800 Words

Tags:
Inflation

Statistical analysis

M2

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