Economics 219

Problem Set #2

1.    Using the BCI Database as a source, collect the data for GDP, real GDP, GDP deflator, real consumption, real investment, real government purchases and merge them (cut and paste) into one spreadsheet. (Note: in doing this, be careful to keep the dates ‘lined up’!)

2.    Plot real GDP and Nominal GDP on the same graph. At what date do the two series cross? Why do they cross at this particular date?

3.    Calculate the inflation rates implied by the GDP deflator and annualize them (the GDP deflator is reported quarterly). Plot the annualized inflation rates. Do inflation rates appear to be stationary?

4.    Collect data for rates of return on 90 day T-Bills, 10 Yr. T-Bonds, Corp Bonds, the stock market index, and the CPI).

  1. Plot the T-Bill rate, the Corp bond rate, and the 10-yr. T-bond rate on the same graph. What relationship do you notice between the rates?
  2. Calculate the CPI Inflation rate (percentage change in the CPI) and annualize it. (1+annual rate) = (1+ monthly rate)^12. Use this to calculate the real return on 90 day T-Bills. Plot the real 90-day T-Bill return. What do you notice about the graph?
5.    Calculate the annual yield for the stock market index (again, percentage change gives you the monthly yield, which must be annualized!). Plot the 90-Day T-Bill Rate and the Stock Market yield. What do you notice about the graph?

6.    Plot Y/P, C/P, I/P, and G/P. Does the data look stationary (constant over time)? If not, transform the data so that it looks stationary. You can use any method that you want, but be sure you use the same method on all four series.

7.    Calculate the variances of the transformed series. It is generally more convenient to report variances relative to output. Therefore, divide each of the reported variances by the variance of output.

8.    Compute the correlation matrix for the five transformed series. Which of the variables are procyclical? Which are countercyclical?