The inflation burst of 2021-2023. The objective of this question is to analyze certain features of the high inflation of 2021-2023 and the associated policy response.

(a) Access FRED (https://fred.stlouisfed.org/) and download the series for the CPI-U [CPIAUCSL] and average hourly earnings of all private sector employees, seasonally adjusted [CES0500000003]. For the period 2020m1-2023m10, compute the rate of inflation, as well as the increase in nominal and real wages, respectively. Standardize the series for CPI, nominal wages, and real wages, by setting their respective first values to 100. Plot the series in the same graph.

(b) Download the series for the effective federal fund rate [FEDFUNDS], as well as yields on 3-month Treasury Bills [DGS3MO], 1-year [DGS1], 5-year [DGS5], 10-year [DGS10] Treasury Notes and 30-year [DGS30] Treasury Bonds, from the start of 1990 onwards. Change the frequency of your data from daily to monthly by taking monthly averages. Plot all series on the same graph. How did the Treasury yields respond to changes in the Fed Fund rate? Consider the declines of the Fed Fund rate of early 1990s, early 2000s, 2009, and 2020, respectively. Did 1-year yields keep on declining for months after the Fed Fund rate bottomed up? How about the 30-year yield? What accounts for such behavior?

(c) The unemployment rate is one of the indicators of labor market tightness monitored by the Federal Reserve. Download the series for the unemployment rate [UNRATE] from 1990 onwards. Plot it along with the effective federal fund rate. Does it appear to you that in the case of the last two recessions the Federal Fund rate has responded to changes in the unemployment rate differently from the past? Please explain.

(d) Another indicator of labor market tightness is the ratio of unemployed to job openings. Please download the series for unemployed [UNEMPLOY] and job openings [JTSJOL]. Plot the ratio of unemployed to job openings together with the unemployment rate. Comment on the co-movement of the two series. Is the ratio of unemployed to job openings redundant, or it provides additional information? Many observers have argued that the measures of slack we looked at so far should be considered against the backdrop of the labor force participation rate. Everything else equal, it is often argued, the lower the labor force participation rate, the larger the slack. Do you agree?