Eco 602 Homework

Homework Week 1

ECO 602 March 2011

Please submit youdown.r homework as a Word Document to the online drop box.

Please use your last name as the filename.

Visit the website of the Federal Reserve Bank of St. Louis (my favorite website). You can find almost all the macroeconomic data

there. The URL is http://research.stlouisfed.org/fred2/. Once there, follow the links in the arrow diagram next page to download and

graph the data. Follow the direction of the arrows. Use Excel to graph. Now answer the questions below.

a. Use the data on real GDP from 2007-01-01 to present to identify periods of expansion and recession.

Recession: when real GDP is going down.

Expansion: when real GDP is going up.

b. Calculate the GDP gaps for all the quarters from 2007-01-01 to present (the GDP gap is the excess of potential GDP over real

GDP. Note that for some quarters it could be negative). Real potential GDP is the level of GDP that could be produced if we

had full employment of resources.

So GDP gap = (Potential GDP) – (Real GDP)

This is how much output we are losing due to unemployment.

For example:

In 2010-07-01 the real GDP = 13278.5 Billion

In 2010-07-01 the potential GDP = 18065.6 Billion

So

In 2010-07-01 the GDP gap = 18065.6 − 13278.5 = 4787.1 Billion

c. Compare unemployment rates to the GDP gaps. Do you see any relationship?

Graph the unemployment rates and the GDP gaps. You should graph them separately due to the scale problem (unemployment

rates are too small, GDP gaps are too big, and so the graphs will be distorted if you draw them in the same graph.) Now just

tell me what you see. Do they move in the same direction, in opposite direction, no relationship?

d. Compare the inflation rates to the unemployment rates. Do you see any relationship?

Yu can actually graph the two in the same place because they have similar magnitudes. Now just tell me what you see. Do they

move in the same direction, in opposite direction, no relationship?

But...