In this box you will analyze the cyclical properties of household expenditure on non-durable goods, on durable goods, and on services. That is, how these variables correlate with the business cycle and whether there is the smoothing behavior predicted by the theory.

Get the following quarterly series from the St. Louis Federal Reserve Bank FRED database from 1999 onwards:

– Real Personal Consumption Expenditures: Nondurable Goods

– Real Personal Consumption Expenditures: Durable Goods

– Real Personal Consumption Expenditures: Services

– Real Gross Domestic Product

Download into Excel. These series are in levels (i.e. in dollars), so calculate their quarterly growth rate (percentage change from quarter to quarter) and plot each of the first three series separately against real GDP in all of them [25 points each series].

What features do you observe? How are they different? From a firm’s perspective, why are these patterns important? [25 points]

The objective of this box is to unify the three indicators into a common framework with emphasis on their correlation and their volatility relative to GDP. Your writing should reflect your familiarity with the concepts and the definitions, along with the theoretical background behind the consumption-saving decision of the household. The theory in the book is about aggregate consumption, and predicts consumption smoothing which is in fact observed in the aggregate, but does it hold in these components of consumption? As always, the charts should have a title and have the axis labeled (with time in x-axis, and label variable(s) and units in the y-axis).