ECO 342 WEEK 2 ECONOMETRICS

CPI and S&P 500 Index problem?  ECO 342


Complete Problem 2.12 of Chapter 2.

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&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?
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	124.0	322.84