Consider the data \"Deflation in the Great Depression\" a. Calculate real intere

Question

Consider the data "Deflation in the Great Depression"

a. Calculate real interest rates in each year making the assumption that the expected level of inflation is last year's rate of inflation. The rate of inflation in 1928 was -1.7%. Do the changes in real interest rates explain the data on real output growth and unemployment better than when you make the assumption the expected rate of inflation is the current year of inflation?

b. Calculate the Okun's law coefficient for each year from 1930 to 1933. To do so, assume the potential output is not growing. Speculate why firms did not take on additional workers in 1933 even though output growth was 9.1% Hint: If potential output is not growing Okun's Law: u-u(-1)= -a gy

year unemployment rate output growth rate one year nominal interest rate inflation rate one year real interest rate 1929 3.2 -9.8 5.3 0.0 5.3 1930 8.7 -7.6 4.4 -2.5 6.9 1931 15.9 -14.7 3.1 -9.2 12.3 1932 23.6 4.0 4.0 -10.8 14.8 1933 24.9 2.6 2.6 -5.2 7.8

Explanation / Answer

real interest rate = nominal interest rate - inflation rate
taking the assumption that the expected level of inflation is last year's rate of inflation
The real interest rate would be as follows: Inflation in 1928 was -1.7

The change in the expevted inflation from current to previous year has changed the real interest rate. the real interest rate based on current inflation rate syncs with the changes in output and unemployment in th economy.

b. Okun's law states that with every one percent increase in cyclical unemployment leads to 2 percent fall in real GDP

Year Unemployment Rate Output growth rate One year nominal interest rate Inflation Rate One year real interest rate Real Interest rate with last years inflation as expected inflation 1929 3.2 -9.8 5.3 0.0 5.3 7 1930 8.7 -7.6 4.4 -2.5 6.9 4.4 - 0 = 4.4 1931 15.9 -14.7 3.1 -9.2 12.3 3.1 - (-2.5) = 5.6 1932 23.6 4.0 4.0 -10.8 14.8 4 - (-9.2) = 13.2 1933 24.9 2.6 2.6 -5.2 7.8 2.6 - (-10.8) = 13.4

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---