Chapter 4 — Exercises

This chapter's exercises are mostly data-lookup tasks. You'll get the most out of this chapter if you actually open FRED and do them, not just read the questions.

Section A — FRED basics

A1. Open FRED (fred.stlouisfed.org). Search for "civilian unemployment rate" (UNRATE). View the chart from 1948 to the present. Identify (approximately) every U.S. recession visible in the chart. For each recession, note: when it started, when it ended, and how high unemployment got.

A2. Stay on the unemployment chart. Now zoom in to 2007–2010. What was the peak unemployment rate during the Great Recession? When did it peak? When did it return to its pre-recession level?

A3. Now zoom in to 2020–2022. What was the peak unemployment rate during COVID? When did it peak? How quickly did it return to its pre-COVID level? Compare the speed of recovery to the 2008–2009 recession.

A4. Search for "labor force participation rate" (CIVPART). View the chart from 1948 to the present. Describe what you see. The rate rose from about 59% in 1948 to about 67% around 2000, then started falling. Suggest two reasons for the rise and two reasons for the fall. (Hint: think about demographics and women's labor force participation.)

A5. Find the U.S. real GDP series (GDPC1). View the chart since 1947. Describe what you see. Approximately how much has real GDP grown over this period? Identify the two largest single-quarter declines. What caused each?

A6. Open the chart for the Consumer Price Index, all items, urban (CPIAUCSL). Toggle the chart to show "Percent Change from Year Ago" (this is in the chart's edit options). Now you're looking at the year-over-year inflation rate. Identify the period of highest inflation in the historical record. When was it? What was the peak rate? Identify the period of lowest inflation. When was it? What was the rate?

Section B — Comparing series

B1. Plot the unemployment rate (UNRATE) and real GDP growth on the same chart. Use FRED's "Edit Graph" feature to add a second series. Then change real GDP from levels to year-over-year percent change. Look at the chart from 1980 to the present. How are the two series related? What does the relationship tell you about the macroeconomy?

B2. Plot real median household income (MEHOINUSA672N) and real GDP per capita on the same chart since 1985. How do the two series compare? Are they growing at the same rate? Different rates? What might explain any divergence?

B3. Plot the year-over-year change in average hourly earnings (AHETPI or similar) against the year-over-year change in CPI (CPIAUCSL) since 2000. The difference between the two is approximately the change in real wages. Identify the periods when real wages were rising and the periods when they were falling.

B4. Compare U.S. unemployment to UK unemployment (UNRATE for U.S., LRHUTTTTGBM156S for UK or similar) since 2000. How are they similar? How are they different?

Section C — The CPI biases

C1. Suppose the CPI overstates true inflation by 0.7 percentage points per year (consistent with modest post-Boskin estimates). Over a 30-year period, by how much does the cumulative overstatement compound? (Hint: it's not 30 × 0.7%; it compounds.)

C2. Imagine you're designing the CPI for the year 1985 and have to anticipate the next 40 years. You will not be allowed to update your basket of goods. Identify three goods you would include in 1985 that would be obsolete by 2025. Identify three categories you'd be missing entirely.

C3. Suppose the BLS adds smartphones to the CPI in 2015 (long after they became widespread). Why would this bias the inflation measurement upward? (Hint: think about what was happening to smartphone prices and quality between 2007 and 2015.)

C4. Why does the Federal Reserve target inflation using core CPI (or core PCE) rather than headline CPI? Give two reasons. Then make the case for why a household budgeting expert might prefer to use headline.

Section D — Reading charts critically

D1. Find a recent news article that contains an economic chart. Apply the three tests from §4.5: (1) does the y-axis start at zero, and if not, is the truncation justified? (2) is the time period suspicious? (3) is the measure the right one for the question? Write a paragraph evaluating the chart.

D2. Imagine you wanted to make U.S. unemployment look as bad as possible. What chart would you make? (Specify the time period, the y-axis, the measure.) Now imagine you wanted to make it look as good as possible. What chart would you make?

D3. A politician says: "Income inequality has risen sharply since 1980." A different politician says: "Median household income is at an all-time high." Both can be true. Use FRED to find the data that would support each statement. Then write a paragraph explaining how both can be true.

D4. Look up the U.S. national debt (GFDEBTN) on FRED. View the chart since 1970. Describe what you see. Now look at the debt-to-GDP ratio (GFDEGDQ188S). Describe what you see. Why does the debt-to-GDP ratio give you a different impression than the absolute debt level?

Section E — The jobs report

E1. Find the most recent BLS Employment Situation Summary (bls.gov, Employment Situation). Read the press release in full. Identify the headline number, the unemployment rate, the labor force participation rate, the U-6 rate, and the year-over-year change in average hourly earnings. Write a one-paragraph honest summary of what the report actually says — better than what most news outlets are saying about it.

E2. Look up the Establishment Survey and Household Survey results from the same month. Are the two consistent? If they disagree, by how much? What might explain the disagreement?

Section F — The CPI release

F1. Find the most recent BLS Consumer Price Index news release (bls.gov, CPI). What was the year-over-year headline inflation rate? What was the year-over-year core inflation rate? Which was higher? Why?

F2. Identify three categories where prices rose the most in the most recent CPI report and three categories where prices fell or rose the slowest. What does the pattern suggest about the underlying drivers of inflation right now?

Section G — Reflection

  • After this chapter, do you think you'll read economic news differently than before? Why?
  • Which of the three "tricks" (truncated axes, cherry-picked dates, wrong measure) do you think you've fallen for in the past?
  • Open FRED right now. Spend 10 minutes exploring. What is the most surprising thing you find?

Selected answers and walkthroughs are in appendices/answers-to-selected.md.