2.12 Table 2-9 gives data on the Consumer Price Index (CPI) for all items (1982-1984=100) and the Standard & Poor’s (S&P) index of 500 common stock prices (base of index: 1941-1943=10). Complete letters a through e in the questions that follow the table.
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
322.84
a. Plot the data on a scattergram with the S&P index on the vertical axis and CPI on the horizontal axis.
b. What can you say about the relationship between the two indexes? What does economic theory have to say about this relationship?
c. 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.
d. Do the results obtained in part c make economic sense?
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