Estimating the natural rate of unemployment
Please answer two questions:
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8. Estimating the natural rate of unemployment To answer this question, you will need data on the annual U.S. unemployment and inflation rates since 1970, which can be obtained very easily from the Economic Report of the President Web site http://www.gpoaccess.gov/eop/index.html Excel tables of the values can be downloaded. Retrieve the annual data for the civilian unemployment rate from Table B-35. In addition, retrieve the annual percentage increase for the consumer price index (CPI), all urban consumers from Table B-63. You can access the same data at the Federal Reserve Bank of St. Louis FRED Web site.
a. Plot the data for all the years since 1970 on a diagram, with the change in inflation on the vertical axis and the rate of unemployment on the horizontal axis. Is your graph similar to Figure 8-5?
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b. Using a ruler, draw the line that appears to fit best the points in the figure. Approximately what is the slope of the line? What is the intercept? Write down your equation.
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c. According to your analysis in (b), what has been the natural rate of unemployment since 1970?
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9. Changes in the natural rate of unemployment
a. Repeat Problem 8 but now draw separate graphs for the period 1970 to 1990 and the period since 1990.
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b. Do you find that the relation between inflation and unemployment is different in the two periods? If so, how has the natural rate of unemployment changed?
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