Complete Problem 2.12 of Chapter 2 and submit to your instructor. Complete your assignment in Excel and submit your completed Excel workbook to your Instructor for grading.

**2.12.** Table 2-9 gives data on the Consumer Price Index (CPI) for all items (1982-1984 = 100) and the Standard and Poor’s (S&P) index of 500 common stock prices (base of index: 1941-1943 = 10).

- Plot the data on a scattergram with the S&P index on the vertical axis and CPI on the horizontal axis.
- What can you say about the relationship between the two indexes? What does economic theory have to say about this relationship?
- 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.

- Do the results obtained in part (c) make economic sense?
- Do you know why the S&P index dropped in 1988?

The following things are some of those you want to be sure are included on and in your graphics:

· Title: What does this graph represent?

· Axis Labels: What is the independent (x-axis) and dependent variable (y-axis)?

· Axis Values: Generally, years are things like 2007 and not something like 6

· Functionality: Remember, the dependent variable always goes on the y-axis!

· Organization: Series with wildly different y-axis values generally speaking should not be graphed on the same graph, otherwise the ability to see variability and relationships in the data is lost. *For instance on 1.6a, the S&P500 index ranges from 0–1500 and the T-Bill yield ranged from 0-14: these do not belong on the same graph.*

Please keep in mind that the way to be sure that I grade your work appropriately is to make sure that I can understand your work. This means things like:

· Organize you work so that it is easy for me to follow

· Keep your work in one worksheet or one workbook

· Set your print areas and print setup so that I can easily print your work

· Short answer and essay questions are to be answered in sufficient detail to provide a complete answer while employing standard English grammar

· Provide at least one answer to every question

· Provide no more than one answer to every question