Based on what we have discussed in class, we know the Federal Reserve System has three definitions of money: M1, M2, and M3. Plot the monthly M1, M2 and M3 data from January 1988 to December 1997 (using a spreadsheet program). Based on the chart you have created, discuss the relationship among M1, M2, and M3 in the last ten years. In addition, determine the volatility (i.e. standard deviation) of M1, M2, and M3. What can you tell from those numbers?

(Note: Your chart should be informative and professional looking.)

We have also discussed the relationship between money supply and the output of an economy (as measured by the GDP). Determine the correlation between:

(Note: Since you have monthly monetary data and quarterly GDP data, you need to first convert your monthly monetary data into quarterly data before doing any of the calculations. For this assignment, we will assume that Quarter 1 makes up of months 1, 2, and 3; Quarter 2 makes up of months 4, 5, and 6; etc.)

Based on the information you have collected, which measure of money should the Federal Reserve System used to target its monetary policy in influencing the economy's output? Explain.

You need to turn in a hard copy of all the data you used. You can find the data on the St. Louis Federal Reserve Bank web site (http://www.stls.frb.org).

Hint:

1. It is easier to copy the data from a web page and then paste them into the spreadsheet. This is less time consuming than inputting the numbers manually. Please remember to parse the data after you have pasted them into the spreadsheet.
2. Some of the functions that you will need for some of the calculations are: