Table 83 Contains the Following Variables, Growth Rates of Real GDP

Essay

Table 8.3 contains the following variables, growth rates of real GDP, M1, M2, velocity of M1 and M2 (denoted V1 and V2), the federal funds rate (FFR), and the CPI inflation rate. Use the quantity equation to calculate the equilibrium inflation rate using individually M1 and M2. Next, calculate the equilibrium inflation rate assuming the quantity theory of money holds. According to your calculations, which is a better predictor of inflation, M1 or M2? Similarly, which is a better predictor of inflation, assuming the quantity theory holds, or not?Table 8.3: Growth Rates
(Source: FRED II, St. Louis Federal Reserve)