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16Subtract from the current year's CPI the CPI from the previous year, divide the difference by the previous year's CPI, and multiply the result by 100. Thus, the inflation rate for Canada for 1974 is [(45.2 - 40.8)/40.8] x 100 = 10.78% (approx.).

16Subtract from the current year's CPI the CPI from the previous year, divide the difference by the previous year's CPI, and multiply the result by 100. Thus, the inflation rate for Canada for 1974 is [(45.2 - 40.8)/40.8] x 100 = 10.78% (approx.).

CHAPTER ONE: THE NATURE OF REGRESSION ANALYSIS 33

1.2. a. Plot the inflation rate of Canada, France, Germany, Italy, Japan, and the

United Kingdom against the United States inflation rate.

b. Comment generally about the behavior of the inflation rate in the six countries vis-à-vis the U.S. inflation rate.

c. If you find that the six countries' inflation rates move in the same direction as the U.S. inflation rate, would that suggest that U.S. inflation "causes" inflation in the other countries? Why or why not?

1.3. Table 1.3 gives the foreign exchange rates for seven industrialized countries for years 1977-1998. Except for the United Kingdom, the exchange rate is defined as the units of foreign currency for one U.S. dollar; for the United Kingdom, it is defined as the number of U.S. dollars for one U.K. pound.

a. Plot these exchange rates against time and comment on the general behavior of the exchange rates over the given time period.

b. The dollar is said to appreciate if it can buy more units of a foreign currency. Contrarily, it is said to depreciate if it buys fewer units of a foreign currency. Over the time period 1977-1998, what has been the general behavior of the U.S. dollar? Incidentally, look up any textbook on macroeconomics or international economics to find out what factors determine the appreciation or depreciation of a currency.

1.4. The data behind the M1 money supply in Figure 1.5 are given in Table 1.4. Can you give reasons why the money supply has been increasing over the time period shown in the table?

TABLE 1.3 EXCHANGE RATES FOR SEVEN COUNTRIES: 1977-1998

Year

Canada

France

Germany

Japan

Sweden

Switzerland

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