Misery Index by BWOnDD


									Economics 212                                                                             Professor Rafferty
Intermediate Macroeconomics                                                                        Fall 2012

                                             The Misery Index

                                 Due: Friday, November 2, 2012 at 3PM.

You are an adviser to President Obama and you have been asked to write a brief 1-2 page (single spaced)
memo putting the performance of the economy during his administration in historical perspective. Use the
Misery Index to summarize the performance of the economy.

Economist Arthur Okun developed the Misery Index during the 1970s as a way of summarizing the burden
that inflation and unemployment were placing on the average U.S. citizen. Okun calculated the Misery
Index as the sum of the unemployment rate and the inflation rate.

In the memo you should:

     1.   For each president from Harry Truman (start with his second term which began in 1949) to the
          most recent, calculate the following: the average value of the Misery Index, the beginning value of
          the Misery Index, the ending value of the Misery Index, and the change in the Misery Index.
          Presidential terms begin late in the month of January. For simplicity, assume that a presidential
          term starts at the beginning of the following February. For example, President Barack Obama was
          inaugurated on January 19, 2009, so treat his administration as beginning February 1, 2009.

     2.   Rank the presidents based on average value of the Misery Index during their administration. Now
          rank the presidents by the change in the Misery Index. Are the rankings the same or different? An
          improving economy is likely to see a decrease in both the unemployment rate and the inflation rate
          so a decrease in the Misery Index (i.e. a negative change) is a sign of good performance.

     3.   Arthur Okun’s version of the Misery Index assumes that a one-percentage point increase in the
          inflation rate is just as bad for households as a one-percentage point increase in the unemployment
          rate. However, this is not necessarily the case. Economists recently conducted a large survey of
          households in Europe and the United States and concluded Okun’s measure of the Misery Index
          understates the hardship caused by unemployment.1 Their results suggest a modified Misery
          Index calculated as:

                   Modified Misery Index = Inflation Rate + 1.7*Unemployment Rate.

          This modified version of the Misery Index places more weight on the unemployment rate than
          Okun’s Misery Index. Calculate the Modified Misery Index and repeat parts 1 and 2.

You should summarize your results in tables (one for Okun’s version of the Misery Index and a second
table for the Modified Misery Index) and place those tables at the end of the memo.

This is a purely descriptive assignment so there is no need to tell President Obama whether he should be
re-elected or not. Simply describe how President Obama ranks compared to other presidents.

You will want to use this Excel file.

 Rafael Di Tella, Robert MacCulloch, and Andrew Oswald. 2001. “Preferences over Inflation and
Unemployment: Evidence from Surveys of Happiness,” American Economic Review, 91(1), pp.335-341.

Please note that this is in the form of a memo. Here is a sample memo format. There are others out there
and you are free to find your own. Just write your assignment in the spirit that it is intended: you are
writing a memo to the President of the United States.

Your answer should be consistent with the intuition in the models from the course. However, you should
never draw a loanable funds model, an aggregate production function, an aggregate demand/aggregate
supply model etc. In other words, avoid economic jargon.


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