Chapter 23: Q.17 (page 618)
Why did the Federal Reserve pursue inherently recessionary policies in the early s?
The central bank uses recessionary measures to keep the country's inflation rate under control and to keep the price of goods and services from rising too quickly.
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Why are central banks so concerned with inflation expectations?
What factors shift the short-run aggregate supply curve? Do any of these factors shift the long-run aggregate supply curve? Why?
What happens to inflation and output in the short run and the long run when taxes decrease?
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), a measure of the price level; real compensation per hour (COMPRNFB); the nonfarm business sector real output per hour (OPHNFB), a measure of worker productivity; the price of a barrel of oil (MCOILWTICO); and the University of Michigan survey of inflation expectations (MICH). Use the frequency setting to convert the oil price and inflation expectations data series to "Quarterly," and
use the units setting to convert the price index to "Percent Change from Year Ago." Download all of the data into a spreadsheet, and convert the compensation and productivity measures to a single indicator. To do this, for each quarter, take the compensation number and subtract the productivity number. Call this difference "Net Wages Above Productivity."
a. Calculate the change in the inflation rate over the four most recent quarters of data available and the four quarters prior to that.
b. Calculate the changes in net wages above productivity, the price of oil, and inflation expectations over the four most recent quarters of data available and the four quarters prior to that.
c. Are your results consistent with what you would expect? How do your answers to part (b) help explain, if at all, your answer to part (a)? Explain using the short-run aggregate supply curve.
Suppose the inflation rate remains relatively constant while output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this scenario is possible.
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