Understanding Real Interest Rates and the Federal Reserves Crisis Response

Question 2 Use the data in the tab Question02 of the file ASSGN02.xlsx. The data item 1 Year Inflation is calculated as the yearly change in the CPI expressed not in a percent format but as a whole number, i.e. the result is multiplied by 100. The value for 1987 is 1.365 Verify this number showing me the calculation that created it. I.e. write it out in a calculable form. When rounded to 3 decimal places it is 1.365 Using the 1 year government bond rate, for each month in the file calculate the ex-post real inflation rate call this newly created variable 1YearRealRate. The value for 1986.01 is 3.76. Here report the average of 1YearRealRate _0.67________. For each year in the table below show me the average values for 1 Year Inflation, DGS1, and 1YearRealRate. Table 1: Values Based on Monthly Averages We learned in the “macro part” of the course that one weapon that the Federal Reserve has in terms of impacting the economy is to lower interest rates. Identifying the “periods of crisis” in 2008-2010 and the years 2020 – 2022 do you see evidence of this effort? Fully explain. Analyzing at table 1, it is true that the Federal Reserve reduces the interest rates during a crisis. For instance, the average DGS1 for 2008 is 1.823 while the DGS1 for 2009 is 0.473. These rates were reduced when America experienced a great financial recession. Additionally, the DGS1 for 2020 is 0.378, while the 0.378 for 2021 is 0.104, which was during the Covid 19 crisis. These values are low when compared to the other DGS1 values. Considering the values of the 1-year real rate for the last 3 years in the table is it likely or not that people in the US are going to work more years and/or retire later than they would if the real interest rate was positive? Fully explain and justify. The 1-year real rate for the last three years in the table above is negative. This implies that the inflation rate is higher than the nominal interest rate. High inflation rates mean that the prices of the commodities increase hence one is left with very little money to save. People in the US will have to work for more years before they retire to try and save a little more. If the 1-year real rate was positive, it would mean that the inflation rate is less than the nominal interest rate. High inflation rates devalue people’s income and savings. The US people will have to work more so as to gather more assets that will last them more when they retire. Question 5 In the aggregate supply and demand model material, there is a concept known as the GDP gap. The gap is defined as the difference between actual and potential GDP. Use the data in the tab Question 05 to do the following. Note that the data appear in time reve