Econ 104 homework #11 part 1 and 2

ECON 104HOMEWORK #11 Part 1

 

  1. In the late 1960s, Milton Friedman and Edmund Phelps argued that there was not a structural relationship between inflation and unemployment rates.  In particular, the trade off could only exist in the short -run.

a)      (10 points) The tradeoff between unemployment and inflation was much discussed throughout the 1960s as there appeared to be a clear tradeoff between unemployment and inflation. In fact, we traced out the Phillips curve beginning in the  early 1960s and continuing through the end of the decade.  In the space below, recreate the Phillips curve that we constructed in the lectures, being sure to label diagram completely.  At minimum, you should have unemployment / inflation combinations for 1961, 1962, 1964, 1966, and 1969.  Connect the dots and we have the tradeoff between unemployment and inflation during the 1960s, aka, the Phillips curve.

b)       (10 points) Now explain why the Phillips curve that you constructed can only be a short-run phenomenon at best.  In particular, explain exactly why, as we went through the decade of the 1960s, we continuously move up and to the northwest along the Phillips curve…. from relatively high rates of unemployment and low inflation to relatively low rates of unemployment and high rates of inflation.  In your answer, make sure discuss the short run aspect of this curve and why, in the long-run, the Phillips curve is vertical (hint: expected inflation, unexpected inflation, actual real wages, and expected real wages should be a big part of your explanation).

 

 

  1. In this question, we are going dig deeper into the Taylor Rule and it variants (modifications).  You will need the following links to answer the following questions. Note, each link takes you to a page where right above the graph on left, there is a “download data in graph” tab – click on it and that will give you access to the data you need. 

As Taylor assumed, we assume the equilibrium real rate of interest, r* = 2% and the optimal inflation rate, the target inflation rate is also equal to 2%.

a)      (10 points) Using the ‘standard’ Taylor rule with Inflation PCE (not the core), and using end of 2011 data (2011-10-01) what is the federal funds rate implied by the ‘standard’ Taylor Rule? 

 

b)      (10 points) Repeat part a) using the modified version of the Taylor using the unemployment gap instead of the GDP gap just like we did in the lectures. Also, use the PCE core rate of inflation instead of overall inflation like you used above – the Fed arguably cares more about core inflation than overall inflation.  According to the actual federal funds rate (use the Effective Federal Funds Rate), is the Fed being hawkish or dovish? Which “Taylor” rule explains Fed behavior better, the original or the modified Taylor Rule? Explain. 

 

 

c)       (10 points) Let’s go back in time to the fourth quarter of 1965 (1965-10-01) when the “We are all Keynesians” was featured in Time magazine.  We argued that this was heyday of Keynesian economics so we would expect to get dovish results.  Using the original Taylor Rule that you used in part a) and the modified Taylor Rule that you used in part b), prove that the Fed was dovish according to both versions of the Taylor Rule.

 

 

d)      (10 points) We now go back to the Volcker period where he was known as being a hawk on inflation. Using the data from the second quarter of 1982 (1982-04-01), prove that the Volcker Fed was hawkish according to both versions of the Taylor Rule.

 

True/ False (40 points total – 2 points each)

1)      According to the “We are all Keynesians Now” article, the labor secretary at that time wanted the unemployment rate to fall down to 3%.

2)      The misery index in 1980 exceeded 25.

3)      The mid to late 1970s was the ‘heyday’ of Keynesian economics in the US economy.

4)      Keynes believed that it was the responsibility of the government to use its powers to increase production, incomes and jobs.

 

5)      Consistent with his thought on spending heavily, Keynes was known as an excellent tipper.

6)      The steeper the SRAS curve, the steeper the short-run Phillips curve.

 

7)      If the long-run aggregate supply curve is vertical so is the long-run Phillips curve.

 

8)      Friedman and Phelps agreed that there is a trade-off between unemployment and inflation, but only in the long run.

 

9)      If actual inflation is lower than expected inflation, then the actual real wage is higher than the expected real wage. This being the case, firms will lay off workers.

10)   According to the Taylor Rule described in the lectures, if the Fed is getting an A+, then the federal funds rate should be set at 5%

 

11)   According to the Taylor principle, if actual inflation rises by 1% over target inflation, then the Fed should raise the federal funds rate by 2% to make sure that the real federal funds rate rises which is referred to as “leaning against the wind.

 

 

12)   If the actual federal funds rate is higher than the funds rates implied by the Taylor rule, then we say that the central bank is hawkish.

 

13)   If actual inflation rises one percent above target and the central bank raises the actual funds rate by one percent then according to the Taylor rule, the central bank is being hawkish.

 

14)    According to the Taylor rule, the Greenspan Fed was hawkish during the new economy years.

 

15)   According to the Taylor rule, the Greenspan Fed was hawkish during the job-less recovery as well as the job-loss recovery.

 

16)   One way to explain the apparent tradeoff between inflation and unemployment during the 1960s, expected inflation was consistently higher than the actual inflation implying that firms would be willing to higher more workers given this difference between expected and actual inflation. The result therefore would be higher inflation and lower unemployment, consistent with the facts during the 1960s

 

17)   We argued that the modified version of the Taylor rule during the jobless recovery following the 1990 – 1991 recession explained Greenspan and the Fed’s behavior much better than the original Taylor Rule.

 

18)   According to the Phillips curve analysis, if expected inflation is equal to actual inflation then we are at NAIRU. However, if actual inflation is higher than expected, then the actual unemployment rate will be higher than that associated with NAIRU.

 

19)   If firms and workers had perfect foresight as to inflation so that actual = expected inflation at all times, then the Phillips curve would be vertical and thus, there would be no trade between unemployment and inflation, even in the short run.

 

20)   We argued that a federal funds rate target of 4% is consistent with the stance of monetary policy being neutral as in neither tight nor loose

 

 

 

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

We value our customers and so we ensure that what we do is 100% original..
With us you are guaranteed of quality work done by our qualified experts.Your information and everything that you do with us is kept completely confidential.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

The Product ordered is guaranteed to be original. Orders are checked by the most advanced anti-plagiarism software in the market to assure that the Product is 100% original. The Company has a zero tolerance policy for plagiarism.

Read more

Free-revision policy

The Free Revision policy is a courtesy service that the Company provides to help ensure Customer’s total satisfaction with the completed Order. To receive free revision the Company requires that the Customer provide the request within fourteen (14) days from the first completion date and within a period of thirty (30) days for dissertations.

Read more

Privacy policy

The Company is committed to protect the privacy of the Customer and it will never resell or share any of Customer’s personal information, including credit card data, with any third party. All the online transactions are processed through the secure and reliable online payment systems.

Read more

Fair-cooperation guarantee

By placing an order with us, you agree to the service we provide. We will endear to do all that it takes to deliver a comprehensive paper as per your requirements. We also count on your cooperation to ensure that we deliver on this mandate.

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency