Q1. Unemployment and Inflation The following Figure illustrates a scatter plot (of the percentage changes) of unemployment rate (UR) and the personal consumption expenditure price index (inflation) for the United States between January 2001 to January 2013. Phillips Curve, 2000:Q1 to 2013:Q1 5.0 4.0 3.0 Inflation Rate 2.0 1.0 Inflation = -0.2398UR + 3.6699 RZ = 0.238 0.0 310 4.0 5.0 6.0 7.0 8.0 10.0 11.0 -1.0 Unemployment Rate (a) Do the data support a Phillips curve-like relationship between unemployment and inflation? [0.5 marks] (b) The scatter also shows the fitted (regression) line on the scatter plot (using the unemployment rate as the independent variable). Based on the fitted line, how much would inflation have to change, on average, in order to lower the unemployment rate by one percentage point? If the actual unemployment rate was 7.7% in January 2013, what would inflation rate be? [1 mark] (c) How much predictive power does the estimated Phillips curve have? (Hint: Consider the R2 value here and its implications). [0.5 marks] (d) Why might the Friedman-Phelps curve perform better? Briefly explain. [0.5 marks]