1. The Fed's maximum employment mandate is generally interpreted as an attempt to achieve

an unemployment rate that is as close as possible to the natural rate and inflation that is

close to its 2% goal for personal consumption expenditure price inflation. Go to the St. Louis

Federal Reserve FRED database and find data on the personal consumption expenditure

price index (PCECTPI), the unemployment rate (UNRATE), and a measure of the natural

rate of unemployment (NROU). For the price index, adjust the units setting to "Percent

Change From Year Ago" to convert the data to the inflation rate; for the unemployment rate,

change the frequency setting to "Quarterly." Download the data into a spreadsheet.

Calculate the unemployment gap and inflation gap for each quarter. Then, using the inflation

gap, make an average inflation gap measure by taking the average of the current inflation

gap and the gaps for the previous three quarters. Now apply the following (admittedly

arbitrary and ad hoc) test to the data from 2000:Q1 through the most recent data available:

If the unemployment gap is larger than 1.0 for two or more consecutive quarters, and/ or the

average inflation gap is larger in absolute value than 0.5 for two or more consecutive

quarters, consider the mandate "violated."

a. Based on this ad hoc test, in which quarters has the Fed "violated" the price stability

portion of its mandate? In which quarters has the Fed "violated" the maximum

employment mandate?

b. Is the Fed currently "in violation" of its mandate?

c. Interpret your results. What does the data imply about the

challenge that monetary policymakers face in achieving the Fed's mandate perfectly at

all times?