Complete Problem 2.12 of Chapter 2 and submit to your instructor. Complete your assignment in Excel and submit your completed Excel workbook to your Instructor for grading.

2.12. Table 2-9 gives data on the Consumer Price Index (CPI) for all items (1982-1984 = 100) and the Standard and Poor’s (S&P) index of 500 common stock prices (base of index: 1941-1943 = 10).

1. Plot the data on a scattergram with the S&P index on the vertical axis and CPI on the horizontal axis.
2. What can you say about the relationship between the two indexes? What does economic theory have to say about this relationship?
3. 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.
4. Do the results obtained in part (c) make economic sense?
5. Do you know why the S&P index dropped in 1988?

The following things are some of those you want to be sure are included on and in your graphics:

·        Title:                       What does this graph represent?

·        Axis Labels:            What is the independent (x-axis) and dependent variable (y-axis)?

·        Axis Values:           Generally, years are things like 2007 and not something like 6

·        Functionality:          Remember, the dependent variable always goes on the y-axis!

·        Organization:          Series with wildly different y-axis values generally speaking should not be graphed on the same graph, otherwise the ability to see variability and relationships in the data is lost. For instance on 1.6a, the S&P500 index ranges from 0–1500 and the T-Bill yield ranged from 0-14: these do not belong on the same graph.

Please keep in mind that the way to be sure that I grade your work appropriately is to make sure that I can understand your work.  This means things like:

·        Organize you work so that it is easy for me to follow

·        Keep your work in one worksheet or one workbook

·        Set your print areas and print setup so that I can easily print your work

·        Short answer and essay questions are to be answered in sufficient detail to provide a complete answer while employing standard English grammar

·        Provide at least one answer to every question

·        Provide no more than one answer to every question