This question focuses on the predictions of the 3 -equation and NK models and how they compare to the real-world data. Use Section 16.3 and your own analysis to answer the following questions:

(a) What do the two models predict should have happened to inflation during the global financial crisis (i.e. a large negative output gap that is expected to persist for a number of periods)?

(b) Choose two OECD economies and use the OECD.Stat website to download inflation data from 2006 to the end of 2011. Plot this data on a graph. Describe the path of inflation for each of these economies over the period.

(c) Does the data more closely match the predictions of the 3-equation model or the NK model? Are there significant differences across the two countries?

(d) What other factors might have influenced the path of inflation in these countries over this period?