The scatter plot below shows the percent change in the Consumer Price Index (the

Question

The scatter plot below shows the percent change in the Consumer Price Index (the inflation rate) and the percent change in stock prices (Wilshire 5000 index of stock prices). 7. Percent change in stock prices 30 10 -10 Inflation Rate (%) 20 -30 Correlation coefficient 0.55 Sources: FRED, BLS Don't overlook the pair of observations at the bottom of the vertical axis: (Inflation Rate, Percent change in stock prices) (096,-39%). The correlation coefficient between the inflation rate and the percent change in stock prices is 0.55. What can we conclude? a. Inflation rates and percent changes in stock prices are positively correlated b. Inflation rates and percent changes in stock prices are negatively correlated. c. Inflation rates and percent changes in stock prices are essentially uncorrelated. Can we conclude that higher inflation rates cause bigger percent changes in stock prices? a. Yes, the correlation coefficient-0.55> 0. b. No, correlation does not prove causation.

Explanation / Answer

Solution(1): The correlation coefficient between the inflation rate and the percent change in stock prices is 0.55. As correlation coefficient is positive that means the inflation rates and percent changes in stock prices are positively correlated. And also 0.55 value indicates that it is a moderate correlation. Hence the correct option is option(a).

Solution(2): Based on the above explaination, yes we can conclude that higher inflation rates cause bigger percent changes in stock prices. Hence the correct option is option(a).

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