Answer Guide for Tutorial 2 Figure 1: Nominal GDP, Year-Over-Year, 1985:Q1 – 2017:Q4 Figure 2: Inflation, 1985:M1 – 2017:M12, Year-Over-Year percent changes in the price index for the Personal Consumption Expenditure component of total GDP, excluding food and energy. Figure 3: Money Growth, 2007:M1 – 2017:M12. Year-Over-Year growth in M2.
Interpretation of the recent joint behaviour of nominal GDP growth, Core PCE inflation and M2 growth: A possible (hopefully sensible) interpretation: Over the past 4-5 years, on average, Core PCE has been below target (2%) fluctuating around 1.5%. In 2017, after a short-lived increase towards the 2% target, Core PCE inflation has declined again to 1.5%. Since late 2016, the growth of the money supply has been declining persistently. This decline in the growth rate of the money supply is worrying given the recently observed low inflation. Taken together, these developments suggest that the Fed should ease the stance of monetary policy by undertaking expansionary open market purchases of US securities in order to expand the supply of reserves. Instead, the Federal Reserve