The table below gives annual U.S. data on the rate of consumer price inflation INF (measured in percentage points) and the unemployment rate UR (measured in percentage points) for the period 1960-1969.
|
YEAR
|
INF
|
UR
|
|
1960
|
1.72
|
5.5
|
|
1961
|
1.01
|
6.7
|
|
1962
|
1.00
|
5.5
|
|
1963
|
1.32
|
5.7
|
|
1964
|
1.31
|
5.2
|
|
1965
|
1.61
|
4.5
|
|
1966
|
2.86
|
3.8
|
|
1967
|
3.09
|
3.8
|
|
1968
|
4.19
|
3.6
|
|
1969
|
5.46
|
3.5
|
Source: Economic Report of the President, Washington, DC, U.S. Government Printing Office, 2006.
First plot the data (with the rate of consumer price inflation on the vertical axis and the unemployment rate on the horizontal axis) and describe the relationship that you see in this plot. Then estimate a linear model of the form
INF = αo + α1UR, + u,
and report the results. Next estimate a reciprocal model of the form
INF, = + β0 + β1 (1/UR1) + v1.
and report the results. Explain which specification appears to give a better fit to the data. Your paper should be no more than 5 pages (double-spaced using 12-point font and one-inch margins), including the plot of the data and the tables in which you report the regression results.