Real output in the United Kingdom from 1960 through 2002 follows. All data are in billions of 2000 pounds.
|
1960
|
355.9
|
1975
|
529.4
|
1990
|
7502
|
|
1961
|
364.6
|
1976
|
543.6
|
1991
|
7404
|
|
1962
|
368.9
|
1977
|
556.9
|
1992
|
7419
|
|
1963
|
387.8
|
1978
|
575.2
|
1993
|
7597
|
|
1964
|
409 4
|
1979
|
590.7
|
1934
|
7977
|
|
1966
|
d16
|
1980
|
578.6
|
1995
|
8152
|
|
1966
|
4271
|
1981
|
570.2
|
1996
|
8547
|
|
1967
|
437.7
|
1982
|
601.2
|
199?
|
8917
|
|
1968
|
456.2
|
1983
|
617.2
|
1998
|
9166
|
|
1969
|
455.8
|
1984
|
619.2
|
1999
|
9519
|
|
1970
|
476.4
|
1985
|
664.5
|
2000
|
9519
|
|
1971
|
486.1
|
1986
|
694.7
|
2001
|
9711
|
|
1972
1973
|
5536
539.8
|
1987
|
729.2
745 0
|
2002
|
9979
|
|
1974
|
|
1988
|
|
|
|
|
532.2
|
1989
|
|
|
|
|
|
|
|
|
|
|
(a) Plot. U.K. real Output over the 42-Year peroid Put real output on the vertical axis of the graph and the year on the horizontal axis.
(b) Estimate potential output by drawing a smooth trend line through the points on the graph. identify any shifts in the trend of potential. By what percent did real output grow during this period?
(c.) Identify the fluctuations of real output around potential output. How many complete (peak-to-peak) economic fluctuations occurred during this period? How does the frequency of economic fluctuations during this period compare with that of the United States during the same
period?
2. We have the following data on interest rates and the price level (in the United States) for the years 1977-2002:
| Year |
Price level |
Interest Rates |
|
1977
|
60.6
|
5.6
|
|
1978
|
65.2
|
7.6
|
|
1979
|
72.6
|
10.0
|
|
1980
|
82.4
|
11.4
|
|
1981
|
90.9
|
13.8
|
|
1982
|
96.5
|
11.1
|
|
1983
|
99.6
|
8.8
|
|
1984
|
103.9
|
9.8
|
|
1985
|
107.6
|
?.?
|
|
1986
|
109.6
|
6.1
|
|
1987
|
113.6
|
6.1
|
|
1988
|
118.3
|
7.0
|
|
1989
|
124.0
|
8.0
|
|
1990
|
130.?
|
7.5
|
|
1991
|
136.2
|
5.5
|
|
1992
|
140.3
|
3.6
|
|
1993
|
144.5
|
3.1
|
|
1994
|
148.2
|
4.7
|
|
1995
|
152.4
|
5.6
|
|
1996
|
156.9
|
5.1
|
|
1997
|
160.5
|
5.2
|
|
1998
|
163.0
|
4.9
|
|
1999
|
166.6
|
4.8
|
|
2000
|
172.2
|
5.9
|
|
2001
|
177.1
|
3.4
|
|
2002
|
179.9
|
1.7
|
(a) Calculate the rate of inflation for the years 1978-2002.
(b) Calculate the expected rate of inflation for the years 1979-2002 assuming (i) people expect the rate of inflation to be the average rate of inflation in the two previous years and (ii) people have perfect foresight sight and expected inflation just equals actual inflation.
(c) For each of the assumptions in part b, calculate the real interest rate for the years 1977-2002.
(d) In light of this example, explain why economists have such a difficult time measuring the real interest rate.
(e) How do you think people forecast inflation? What informatio they use? Do you think they systematically underestimate chang the price level?