1. Consider the following data: historical Canadian interest rates and unemployment rates.

Year

Interest rate

Unemployment rate

1980

12.75

7.5

1981

17.8

7.6

1982

13.8

11

1983

9.3

11.9

1984

11.1

11.3

1985

9.5

10.5

1986

9

9.5

1987

8.2

8.8

1988

9.4

7.8

1989

12

7.5

1990

12.8

8.1

1991

8.9

10.3

1992

6.5

11.3

1993

4.9

11.5

1994

5.4

10.3

1995

7

9.5

1996

4.2

9.7

1997

3.3

9.2

1998

4.7

8.3

1999

6.4

7.6

2000

7.5

7.1

2001

4

7.2

2002

3.7

7.7

2003

3.5

7.6

2004

2.5

7.2

2005

3.25

6.8

2006

4

6.3

2007

4.5

6

2008

3.3

6.1

2009

0.7

8.3

2010

1

8

1. Roughly sketch a time-series graph of the interest rate. [Hint: the bolded numbers are local peaks].What is the overall trend in interest rates over this period?
2. In which year: (i) was interest rate highest? (ii)lowest? (iii)increasethe most?
3. Consider the years from 2001 to 2010.Draw a diagram to show the relationship between the interest rate and the unemployment rate. Describe the relationship. Do you thinktheinterest rate andtheunemployment ratecould becausallyrelated?
4. Discussion Questions:

Could you look at the data differently to see if there is a relationship? How?

[H1]If the Central Bank(the Bank of Canada)chooses to set the interest rate in response to conditions in the economy, what kind of choices is the Central Bank making?

[H2] If the interest rate goes up or down with inflation (that is, the interest rate is positively correlated with inflation), what then is the relationship between inflation and unemployment?