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Question Description

**Instructions**

This assignment is “optional.” Your grade for this assignment will be the maximum between the points you obtain in the assignment and your highest numerical assignment grade.

For example, say that your first three grades were 22, 26, and 23. If you obtain 20 points in this assignment, your grade will be 26. If you obtain 30 points, your grade will be 30. If you do not submit this assignment, your grade will be 26.

To obtain full credit, submit your spreadsheet, and include your written answers as part of the spreadsheet.

*Throughout the assignment, be careful with units. *

**Questions**

**(a) 2 points.** Create a new spreadsheet with 3 columns: Date, Real GDP, and Potential GDP. Download the data from FRED to populate the table:

- Real GDP,

$Y$t : https://fred.stlouisfed.org/series/GDPC1 (Links to an external site.) - Potential GDP,

$Y$¯ t : https://fred.stlouisfed.org/series/GDPPOT (Links to an external site.)

Use a quarterly frequency, starting from the first quarter of 1980 (1980-01-01 in the data) up to the most recent data point available.

*Note: We will use the same starting date for all series downloaded thereafter. For the end date, always download up to the most recent data point, even if it differs from one series to another.*

**(b) 4 points.** Create a plot to display Real GDP and Potential GDP as a function of time. Format the plot so that Potential GDP is dashed. Label the axes (specify the units) and add a legend.

* (c) 5 points.* Create a new column named “Short-Run output,” and populate it using the formula

$Y$

Plot the series for short-run output as a function of time in a new graph. Make sure to label the axes and specify the units.

**(d)*** 2 points.* In the first quarter of 2020, was output above or below potential? By how much? Your answer should be of the form: “In the first quarter of 2020, real GDP was _____% (above/below) potential GDP.”

**(e) 2 points.** Given the change in the short-run output you reported in (d), what does the Phillips curve predict for the rate of inflation? (i.e., does the Phillips curve predict that the inflation rate would go up, down, or remain identical?).

**(f) 2 points.** Let’s check what has happened to inflation in the data. Download the following series for the price level,

, from FRED: https://fred.stlouisfed.org/series/CPIAUCSL (Links to an external site.). Make sure to change the frequency to quarterly. Copy this series to a new column.

**(g) 5 points.** Create a new column named “Inflation rate.” Use the series downloaded in (f) to compute it. Then, plot the inflation rate as a function of time. Again make sure to label the axes and specify the units.

*Hint: Recall that the inflation rate is the percent change between the price level at time t and at time t+1. You will not be able to compute the inflation rate for the first quarter of 1980, since you do not have the price level information for the fourth quarter of 1979. Just fill in the column starting from the second quarter of 1980.*

**(h) 3 points**. What was the inflation rate in the first quarter of 2020? How does it compare to the inflation rate in the fourth quarter of 2019? Does this change in the inflation rate corresponds to the Phillips curve-based prediction you made in (e)?

*Note: The inflation rates are small numbers because they are at a quarterly frequency. We have been looking at inflation rates at the yearly frequency in the lectures. For example, if the quarterly inflation rates are 0.3%, 0.4%, 0.2%, and 0.8%, the yearly inflation rate can be obtained by the formula (1.003*1.004*1.002*1.008-1)*100 =1.71%. You do not need to do any such calculation here.*

**(i) 5 points**. Download the series on the Fed Funds rate from FRED, quarterly: https://fred.stlouisfed.org/series/FEDFUNDS (Links to an external site.). Plot it as a function of time in a new graph. Looking at the value of the Fed Funds rate in the first quarter of 2020, do you think that the Federal Reserve can hope to boost the economy by increasing the money supply and decreasing the interest rate further? Why or why not?