Download the file macro data.xlsx, that contains data for unemployment rate and annual inflation and semiannual frequency from 1958 to 2013. During the 60s, economists thought that there was a negative relation between unemployment and inflation, called Phillips Curve. As a consequence, they believed that the Federal Reserve could decrease unemployment simply by creating some extra inflation, or that a tight labor market would have always resulted in higher wages and higher prices, i.e., higher inflation. In the 70s, the Phillips Curve broke down, and the US experienced both high inflation and high unemployment. Provide the answers to the following questions on paper. Note: in this question, you are required to construct some graphs using Excel: 1) include a clear and self-explanatory title; 2) label the axes; 3) in general, make sure that the graph is well-formatted (as if you were working for a wealth management firm, preparing graphs that will be shown to some clients).

1. Plot a graph with unemployment rate on the horizontal axis, and inflation on the vertical axis, for the period 1958-1968 (include 1968). Use a scatter plot (Mac: Chart Scatter Marked Scatter; Windows: Insert Scatter). Each point on the plot should corresponds to a semiannual period in the sample. Add a trendline (Mac: in Chart Layout, click on Trendline Linear Trendline; Windows: in Design, click on Add Chart Element Trendline Linear). Is there a negative or positive relation between inflation and unemployment? Print your graph and include it in your answers. [1.25 point]
2. At the beginning of the 70s, a new Fed Chairman was appointed. The new Chairman conducted policy under the influence of politicians in Washington who wanted a lower unemployment rate. Entrepreneurs soon figured out that the Fed wanted to increase inflation in order to decrease unemployment. Given expectations of high inflation, businesses increased prices and wages but were not necessarily willing to hire more. Thus, the policies of the Fed resulted in high inflation but not lower unemployment (due to some recessions and higher oil prices, the US actually experienced both high inflation and high unemployment).

Verify this story in the data: plot a graph with unemployment rate on the horizontal axis, and inflation on the vertical axis, for the period 1969-1985 (include 1985). Use a scatter plot and add a trendline. Is there a negative or positive relation between inflation and unemployment? Print your graph and include it in your answers. [1.25 point]

3. We saw in class that the US economy is now experiencing low inflation and modest and declining unemployment. This is the reverse of the 70s, but its the same positive relationship between inflation and unemployment. The Fed thinks that the strong labor market will necessarily have an impact on inflation, sooner or later.

Assume instead that businesses expect no competitors will increase prices, even if the labor market is tight, and thus are not willing to increase prices themselves (and they can afford to do that due to the cheap cost of credit). Assume also that the Fed announces that it will increase the nominal interest rate as soon as it detects signs of inflationary pressure.

1. What is the consequence for inflation and interest rates in the long run, if businesses will not increase prices? [0.75 point]
2. What do you conclude about the link between inflation and unemployment: is there a clear-cut relation between the two, or not? Do you think it is enough to look at correlation in the data to form macroeconomic forecasts, or should you also think about expectations of businesses, households, and investors, in order to make appropriate forecasts? [0.75 point]