Macroeconomics 5th Edition by Olivier Blanchard

Exercise 2

Consumer confidence and disposable income
Go to the Web site of the University of Michigan Survey of Consumers (www.sca.istumich.edu), and download data on the quarterly Index of Consumer Sentiment from 1960 to the present day. We will use this data series as our measure of consumer confidence. Now, go to the Web site of the Bureau of Economic Analysis (www.bea.gov), and fine the quarterly version of Table 2-1. The last row of the table gives the percentage change in real personal disposable income. (The quarterly percentage changes are annualized.) Obtain this data for 1960 to the present day.
a. Before you look at the data, can you think of any rea-sons to expect consumer confidence to be related to disposable income Can you think of reasons why consumer confidence would be unrelated to disposable income
b. Calculate the average quarterly percentage change in personal disposable income over the entire period, and subtract this average from each quarterly observation of the percentage change in personal disposable income. Use this new data series as your measure of the quarterly change in personal disposable income. Now calculate the quarterly change in consumer confidence as the quarter-to-quarter change in the Index of Consumer Sentiment. Plot the change in consumer confidence against the change in personal disposable income (the measure you constructed in this part). Is there a clear relation (positive or negative) between the two variables If you believe there is a relation, is it very tight In other words, are there many observations that deviate greatly from the average relation
c. Look at the data for the third quarter of 2001 and the first quarter of 2002. What happened to personal dis-posable income during these two quarters What happened to consumer confidence Why do you think consumer confidence behaved differently in these two time periods