economic problem need in 2 hours

 

2.12   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).  Complete letters a through e in the questions that follow the table.

Table 2-9  CONSUMER PRICE INDEX (CPI) AND S&P 500 INDEX (S&P), UNITED STATES, 1978-1989

Year

CPI

S&P

1978

65.2

96.02

1979

72.6

103.01

1980

82.4

118.78

1981

90.9

128.05

1982

96.5

119.71

1983

99.6

160.41

1984

103.9

160.46

1985

107.6

186.84

1986

109.6

236.34

1987

113.6

286.83

1988

118.3

265.79

1989

124

322.84

 

a.        Plot the data on a scattergram 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?