Using the annual data on gold prices, the Consumer Price Index (CPI), and the Ne

Question

Using the annual data on gold prices, the Consumer Price Index (CPI), and the New York Stock Exchange (NYSE) Index for the United States over the period 1977-1991 we have test two regressions suggesting whether gold and stocks are a good against inflation, and the results are given below: 5+10 3. hedge Regression 1: Gold price Bi+p2CPletu Regression 2: NYSE Index1-pl+2CPIctut Explain economic theory underlying the regression equations. The relationship between gold prices and consumer prices as well NYSE and consumer prices, as represented by the equations above, is tested by using regression analysis and the results obtained are given below. Interpret these regression results and explain whether gold or stock is better hedge against inflation. a. b. Ps .-101.90 + 2.13 se (23.78) (0.230) R"=0.87 F= 85.32 N=15 =186 . 18 + 1.84 P,c se (125.40) (1.22) R:= 0.15 F= 2.30 N=15

Explanation / Answer

a) the above regression equations state that Price of gold and price of NYSE depends on consumer price index which gives inflation rate. Higher the consumer price index higher is the price of gold and NYSE.

b) both equations states that there is positive relationship between price of gold and price of NYSE are positively related to price index. If price index increases by 1 unit price of gold increases by 1.84 units. If price index increases by 1 unit NYSE increases by 2.13 units.

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