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4. Chile had a tumultuous economic record during the 1970s and 1980s. It suffered a major inflation and two severe recessions. Column 1 in the table below shows the annual rate of change in money stock for the years 1970 through 1983. The table also shows rates of inflation and changes in manufacturing output. However, the three blocks showing inflation and changes in output, labeled A, B, and C, are not in the right order. What is the proper order for these blocks? (Hint: The correct order is the one that is most consistent with the predictions of inflation that the quantity theory gives.)
Not only has Chile had wide variations in monetary growth, but it has had equally drastic changes in other aspects of economic policy. In November of 1970 Salvador Allende won the presidency and began to transform Chile into a socialist society by nationalizing industries and by discouraging private business in a variety of ways. He was overthrown in a military coup in September of 1973. The ensuing military dictatorship cut government control of the economy, denationalizing some industries, and cutting regulation for others. One could expect that these large nonmonetary changes would be more important than the monetary changes. Given the data above, how much of the price changes seem to be explainable in terms only of changes in money? (Almost all, most, half, a bit, almost none?) How much of the changes in manufacturing output can be explained solely in terms of changes in money? Can more of the price movements or more of the output changes be explained in terms of money? (Comment: You might try graphing all three series together. A picture is worth a thousand words.)
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1970 |
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1971 |
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1972 |
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1973 |
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1974 |
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1975 |
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1976 |
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1977 |
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1978 |
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1979 |
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1980 |
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1981 |
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1982 |
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1983 |
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1984 |
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