From the text Web site, link to the site of the Federal Reserve Bank of St. Louis; also, see the “Guide to St. Louis Fed Data." Get annual data on the inflation rate, the interest rate on 3-month Treasury bills, and the unemployment rate.
a. According to the AE curve and Okun’s law, what is the relationship between the real interest rate and unemployment?
b. Using data from 1960 to the present, plot the unemployment rate against the real interest rate, defined as the nominal T-bill rate minus inflation. That is, make a graph with the unemployment rate on one axis, the real interest rate on the other, and a point for each year. What relationship, if any, do you see?
c. Are the relationships in parts (a) and (b) similar or different? If they are different, try to explain why. Do the results in (b) show that our theory about the AE curve is wrong?