# On January 28, 2014, the Federal Reserve released a special statement

Originally posted 2018-07-18 04:53:17. Republished by Blog Post Promoter

# On January 28, 2014, the Federal Reserve released a special statement

On January 28, 2014, the Federal Reserve released a special statement that clarified its goals of “price stability” and “maximum employment”. Specifically, it stated that the Committee judges that inflation is at the rate of 2 percent, as measured by the annual change in the price index for

personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate” and that “FOMC’s participants’ estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 to 6.0 percent.” Assume this statement implies that the natural rate of unemployment is believed to be 5.6%.

Go to the St. Louis Federal Reserve FRED database, and find data on:
– Personal consumption expenditure price index (PCECTPI), a measure of the price level, – Unemployment rate (UNRATE),
– Real GDP (GDPC1), and
– Real potential gross domestic product (GDPPOT), an estimate of potential GDP.
Use the units setting to convert the price index to “Percent Change from Year Ago”. Download all the data into a spreadsheet.

a) For the most recent four quarters of data available, calculate the average inflation gap using the 2% target referenced by the Fed. Calculate this value as the average of the inflation gap over the four quarters. Describe and explain your findings. Limit: 250 words.

b) For the most recent four quarters of data available, calculate the average output gap using the GDP measure and the potential GDP estimate. Calculate the gap as the percentage deviation of output from the potential level of output. Calculate the average value over the most recent four quarters of data available. Describe and explain your findings. Limit: 250 words.

c) For the most recent 12 months of data available, calculate the average unemployment gap, using the 5.6% as the presumed natural rate of unemployment. Describe and explain your findings. Limit: 250 words.

Using all information calculated in parts a, b and c, answer the following questions:

Part 1. Does the divine coincidence apply to the current economic situation? Why or why not? What does your answer imply about the sources of shocks that have impacted the current economy? Note: Divine coincidence: when a policy meant to stabilize inflation is also good to stabilize output. Fully explain (Limit: 625 words)

Part 2. Using the models presented in the course, such as Aggregate Demand and Supply model,

how could you explain this information? What is your forecast for the economy (taking into account only the mechanism of adjustment and if the monetary authority pursues an economic policy)? Make the necessary assumptions about the goal of this policy. Fully explain (Limit: 625 words)