Reference no: EM1396661

Real output in the United Kingdom from 1960 through 2002 follows. All data are in billions of 2000 pounds.

1960	355.9	1975	529.4	1990	7502
1961	364.6	1976	543.6	1991	7404
1962	368.9	1977	556.9	1992	7419
1963	387.8	1978	575.2	1993	7597
1964	409 4	1979	590.7	1934	7977
1966	d16	1980	578.6	1995	8152
1966	4271	1981	570.2	1996	8547
1967	437.7	1982	601.2	199?	8917
1968	456.2	1983	617.2	1998	9166
1969	455.8	1984	619.2	1999	9519
1970	476.4	1985	664.5	2000	9519
1971	486.1	1986	694.7	2001	9711
1972 1973	5536 539.8	1987	729.2 745 0	2002	9979
1974		1988
	532.2	1989

(a) Plot. U.K. real Output over the 42-Year peroid Put real output on the vertical axis of the graph and the year on the horizontal axis.

(b) Estimate potential output by drawing a smooth trend line through the points on the graph. identify any shifts in the trend of potential. By what percent did real output grow during this period?

(c.) Identify the fluctuations of real output around potential output. How many complete (peak-to-peak) economic fluctuations occurred during this period? How does the frequency of economic fluctuations during this period compare with that of the United States during the same
period?

2. We have the following data on interest rates and the price level (in the United States) for the years 1977-2002:

Year	Price level	Interest Rates
1977	60.6	5.6
1978	65.2	7.6
1979	72.6	10.0
1980	82.4	11.4
1981	90.9	13.8
1982	96.5	11.1
1983	99.6	8.8
1984	103.9	9.8
1985	107.6	?.?
1986	109.6	6.1
1987	113.6	6.1
1988	118.3	7.0
1989	124.0	8.0
1990	130.?	7.5
1991	136.2	5.5
1992	140.3	3.6
1993	144.5	3.1
1994	148.2	4.7
1995	152.4	5.6
1996	156.9	5.1
1997	160.5	5.2
1998	163.0	4.9
1999	166.6	4.8
2000	172.2	5.9
2001	177.1	3.4
2002	179.9	1.7

(a) Calculate the rate of inflation for the years 1978-2002.

(b) Calculate the expected rate of inflation for the years 1979-2002 assuming (i) people expect the rate of inflation to be the average rate of inflation in the two previous years and (ii) people have perfect foresight sight and expected inflation just equals actual inflation.

(c) For each of the assumptions in part b, calculate the real interest rate for the years 1977-2002.

(d) In light of this example, explain why economists have such a difficult time measuring the real interest rate.

(e) How do you think people forecast inflation? What informatio they use? Do you think they systematically underestimate chang the price level?