Answer the following question using the FRED database.

https://fred.stlouisfed.org

1.1)

(1.1a) Plot the three-month U.S. Treasury bill rate (FRED code: TB3MS) from 1960 to the present. What long-run pattern do you observe? What may have caused this pattern?

(1.1b) Then, plot the inflation rate based on the percent change from a year ago of the U.S. consumer price index (FRED code: CPIAUCSL) from 1960 to the present. How does U.S. inflation history reflect your explanation in part (1a)?

(1.2)

The expected real interest rate is the rate which people use in making decisions about the future. It is the difference between the nominal interest rate and the expected inflation rate, not the actual inflation rate.

(a) How does expected inflation over the coming year compare with actual inflation over the past year?

(b) Plot the inflation rate since 1978 based on the percent change from a year ago of the U.S consumer price index (FRED code: CPIAUCSL). Add to this figure as a second line the expected inflation rate from the University of Michigan survey (FRED code: MICH).

(c) Is expected inflation always in line with actual inflation?

(d) Which is more stable?