Question

Collect data on inflation and unemployment for the UK and the US during the 1970s and 1980s using OECD.stat. The 1980s was a period of significant disinflation for the two economies. Use the data gathered* and content of the chapter 4 of the textbook to answer the following questions:

a. Was the disinflation costly in terms of unemployment?

b. Does the data provide evidence that inflation expectations were being formed rationally during this period?

c. How can the concept of anchored expectations be used to suggest that the UK and US governments could have done to reduce the costs associated with disinflation.

(*) Plot the data with unemployment in the x-axis and inflation in the y-axis. Paste the charts at the beginning of your answer, and refer the analysis to them.

Answer 1

Collect data on inflation and unemployment for the UK and the US during the 1970s and 1980s using OECD.stat. The 1980s was a period of significant disinflation for the two economies. Use the data gathered* and content of the chapter 4 of the textbook to answer the following questions:

a. Was the disinflation costly in terms of unemployment?

b. Does the data provide evidence that inflation expectations were being formed rationally during this period?

c. How can the concept of anchored expectations be used to suggest that the UK and US governments could have done to reduce the costs associated with disinflation.

(*) Plot the data with unemployment in the x-axis and inflation in the y-axis. Paste the charts at the beginning of your answer, and refer the analysis to them.

Answer: disinflation is the slowing the rate of price. Which means slowing inflation. During 1980s government tried to control the inflation so sell all government securities that is tighten monetary policy .it leads to reduce the supply of money in the economy and control inflation. Disinflation in control way can be good for economy . In 1980s government used this tools to control inflation. So we can say that if we consider Phillips curve disinflation in control way with unemployment is good but in long run as econonomist try to fix the unemployment this will leads to increase in inflation. Diagram is given below.

b)

Answer: from the diagram given above we can conclude that in order to reduce unemployment there was inflation in long run so inflation expectation can be said to be rational.

C)

Answer : in answer for question (a) image is explaining the relationship between inflation and unemployment.

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