4. How similar are the output gap (Y-Y^N) and cyclical unemployment rate (U^C=U-U^N) as measures of short-run fluctuations? Use real GDP (Y), real potential GDP (Y^POT=Y^N), the CPI (P), and the core CPI (P^C) from the data table above to construct a graph from 1949-present using LINE 1 and LINE 2. For LINE 1, construct the output gap = ((Y-Y^N)/Y^N)*100 and for LINE 2 construct the cyclical unemployment rate U^C = U - U^N. NOTE: All data should be quarterly frequency.

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QUESTIONS: Compare and contrast the output gap and cyclical unemployment rate from 1949-present. How are they similar and how are they different? Do the variables describe the macroeconomy similarly in terms of qualitative levels (positive, negative, or about zero)? NOTE: For the previous question, the issue is whether the output gap is positive when cyclical unemployment is negative (or vice versa), and whether both are about zero at the same time. Do the variables describe the macroeconomy similarly in terms of their quantitative levels (numeric values of the rates)? NOTE: For the previous question, remember that the output gap and cyclical unemployment rate have opposite signs (+ and -). So, if the output gap is +2 percent and cyclical unemployment is -2 percent (or vice versa) then the variables are similar numerically. Finally, find and describe two examples where the output gap and cyclical unemployment rate give different views of the state of the business cycle. Be sure to explain why the descriptions are different.

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