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Q7. Below are a pair of time series graphs of inflation (solid green line) and GDP growth (dashed black line) for the United States and Greece (the shaded bars in the US graphs represent recessions). FRED~ - Inflation, consumer prices for the United States - . Gross Domestic Product by Expenditure in Constant Prices: Total Gross Domestic Product for the United States 15.0 12.5 10.0 7.5 (Percent) , (Growth Rate Previous Period) 5.0 2.5 0.0 -2.5 -5.0 1980 1985 1990 1995 2000 2005 2010 Shaded areas indicate US recessions - 2015 research.stlouisfed.org FRED.~ - Inflation, consumer prices for Greece - . Gross Domestic Product by Expenditure in Constant Prices: Total Gross Domestic Product for Greece@ 30 25 20 15 (Percent) , (Growth Rate Previous Period) 10 O -5 -10 1980 1985 1990 1995 2000 2005 2010 2015 research.stlouisfed.org(a) For the US data, comment on whether or not you can see evidence of a tradeoff between growth and inflation in the 1980s, the 1990s and then the 2000s. What do you think might have been happening to inflation expectations? Evidence of a growth/inflation tradeoff - 1980s: yes; 1990s: yes; 2000s: yes. In the early 1980s, a pair of back-to-back recessions brought the US inflation rate from highs of 11% or 12% to an average of about 4% in the second half of the 1980s. The 1990-91 recession further reduced inflation from 4% to about 2%. The 2% inflation rate prevailed from the early 1990s until the 2007-09 recession, when the Americans briefly experience mild deflation as a result of the weak growth. (b) For the Greek data, comment on whether or not you can see evidence of a tradeoff between growth and inflation in the 1980s, the 1990s and then the 2000s. What do you think might have been happening to inflation expectations?' Evidence of a growth/inflation tradeoff - 1980s: yes; 1990s: no; 2000s: sort of. In the 1980s, Greek inflation fell only very slowly even after many years of low or negative growth, suggesting either that Greek inflationary expectations were persistently very high, or that the Greeks had a very low B (or both). In the 1990s, the Greeks experienced a huge fall in inflation coupled with a rise in growth, which appears to contradict the predictions of the Phillips curve, but this is probably due to the fact that the Greeks had signed on to the 1992 Maastricht treaty which obliged them to join the Euro; this effectively allowed the Greek central bank to "borrow credibility" from the central banks of EU states such as Germany and France who had traditionally had much lower inflation rates. Expectations of Greek inflation appear to have dropped even though growth was accelerating. In the 2000s, even sharply negative growth seems to have had little effect on inflation, but that is mainly because inflation is reasonably similar across the EU and Greece has only about 11 million people out of the Eurozone's 334 million, so that Greek economic conditions are not the dominating factor in determining Eurozone inflation