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




Get 20% Discount on This Paper
Pages (550 words)
Approximate price: -

Try it now!

Get 20% Discount on This Paper

We'll send you the first draft for approval by at
Total price:

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

Custom Writings Help is a Quality-Oriented Company in Online Writing as a result of hiring exceptional professionals to execute clients' tasks.


Research Papers

At Custom Writings Help,We understand the struggle of research paper writing, and that is why at Custom WritingS Help, we are all out to help you. We pride ourselves on having a team of clinical writers. The stringent and rigorous vetting process ensures that only the 'BEST' Writers are chosen for the job. We have highly qualified Ph.D. and MA writers working with us; we equally offer these experienced writers specific bonuses and incentives to make them deliver highly original, unique, and informative content at reasonably low prices.


Thesis Writing Service

Worlwide, Many Masters Students are struggling with Thesis Completion. A thesis is likely to be the longest and most challenging piece of work a student has ever completed. However, unlike essays and other assignments, a student can pick a particular interest topic and work on their initiative. Fortunately, we are there for you. At Custom Writings Help, you are assured of an authentic, imaginative, informative, linguistically great, and advantageous thesis that adheres to all your needs. So, why continue considering different writers when you have discovered the best in the field?


Custom Papers

Not a single student can avoid writing custom papers. However, a total lack of experience, skills, and time makes it very hard to produce a superb writing piece. Therefore, if you are seeking professional help, turn to us. Our specialized and experienced writers compose a variety of model papers, including custom essays, college term papers, research papers, book reports, MBA essays, executive summaries, dissertations, Ph.D. theses, admission essays, and research proposals for college and university students at any level.


Essay Writing

Most of the students disregard the critical principles of essay writing and compose papers below sensible guidelines. Therefore, with Custom Writings Help, one should not worry about his/her essay. Our Writers compose informative and engaging content on all complexities and topics. We write meaningful and smart essays while prioritizing all aspects that bring about a good grade, such as impeccable grammar, proper structure, zero-plagiarism, and conformance to guidelines.


Coourse Work Writing

Don't let the seemingly never-ending onslaught of writing assignments get you down. If you are looking where to get course work assistance online, the writers at Custom Writings Help are here to assist you with all of your writing needs. We undertake to unique delivery of papers that meet the professor's requirements. The content is proofread, edited, and checked plagiarism before submission to customers. No matter how big or small your work is, we will deliver on time. Try US Now! !


Dissertation Writing Service

High-Quality Dissertation Writing Services are rare. They require Ph.D. academicians – not easily found. However, are an exception. The years, time, and resources we have invested in the dissertation world has given us a competitive advantage over others. Choose to come to Custom Writings Help; You will find perfect Ph.D. consultants who have written hundreds of dissertations theses ready to help you. Let our dissertation-writing services help you craft your dissertation, for you are assured we will give you the results.

Open chat