EBK ECONOMICS OF MONEY, BANKING AND FIN
EBK ECONOMICS OF MONEY, BANKING AND FIN
5th Edition
ISBN: 8220106799727
Author: Mishkin
Publisher: PEARSON
Question
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Chapter 23, Problem 2DAP
To determine

  1. Change in the inflation rate over the four most recent quarters of data available and the four quarters prior to that
  2. Changes in the 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
  3. The answers to part a and part b using short-run aggregate supply curves.

Expert Solution & Answer
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Explanation of Solution

Data:

  • Personal Consumption Expenditure Price Index - PCE: A measure of Price Level
  • Net Wages Above Productivity - NWAP: Compensation − Productivity
  • Compensation - Comp: Real Compensation Per Hour
  • Productivity- Prod. : Non-Farm Business Sector Real Output Per Hour
  • Inflation Expectations - IE: MICH
  • Price of Parallel of Oil: PBO

  Change in Price of Barrel of Oil  PBO2 -PBO1_                                                               PBO1

  • [of a quarter of current year w.r.t to the prior quarter of previous year]
  •   Change in Inflation Expectations  IE2 -IE1_                                                              IE1

  • [of a quarter of current year w.r.t to the prior quarter of previous year]
  •   Change in Inflation Rate  PCEPI2 -PCEPI1_×100                                                    PCEPI1 [of a quarter of current year w.r.t to the prior quarter of previous year]

      NWAP  Compensation - Productivity                                                  

      Change in NWAP  NWAP2 -NWAP1_×100                                            NWAP1 [of a quarter of current year w.r.t to the prior quarter of previous year]

    Spreadsheet:

      YearPCEChange in Levels of PCE Change in Inflation Rate %Comp.Prod.NWAPChange in Level of NWAPChange in Level of NWAP %PBOChange in Level of PBOChange in Level of PBO %IEChange in Level of IEChange in Level of IE %
      2016 Q1 jan109.9103.4106.4-331.62.5
      2016 Q2 apr110.5103.9106.6-2.740.72.8
      2016 Q3 july111104.1107.3-3.244.62.7
      2016 Q4 oct111.5102.2107.6-5.449.72.4
      2017 Q1 jan112.12.22.00102.7107.6-4.9-1.963.3352.520.966.142.60.14.00
      2017 Q2 apr112.21.71.54102.8108.1-5.3-2.696.305110.325.312.5-0.3-10.71
      2017 Q3 july112.61.61.44103.2108.8-5.6-2.475.0046.624.482.6-0.1-3.70
      2017 Q4 oct113.41.91.70103108.9-5.9-0.59.2651.51.83.622.400.00

    *St. Louis Reserve Fred Database

    Interpretation: Findings from above Table

    • Inflation Rate: Continuously Declining
    • Cost of Inputs: Declining
    • Labour Productivity: First Increasing and then Declining
    • Inflation Expectations: Declining
    The aggregate supply curve shifts to the right as productivity increases or the price of barrels of oil falls, making a combination of lower inflation, higher output, and lower unemployment possible.

    A fall in oil prices (and a fall in firms costs) will shift the short-run aggregate supply (SRAS) to the right, causing lower inflation and higher real GDP.

    The declining inflation expectations meet the declining inflation rate due to a rightward shift in aggregate supply.

    If we expect prices to decline in future, the demand for wages declines and so firms reduce their prices. Thus the short term supply [SRAS] would increase.

      EBK ECONOMICS OF MONEY, BANKING AND FIN, Chapter 23, Problem 2DAP
    Economics Concept Introduction

    Introduction:

    Aggregate or Total Supply, otherwise called as total yield, is the aggregate supply of products and services delivered inside an economy at a given general price level in a given period. It is depicted by the total supply curve, which indicates the connection between price levels and the amount of yield that organizations will provide. Normally, there is a positive connection between total supply and the price level.

    A shift in total supply can be ascribed to various factors. These incorporate changes in the size and nature of work, mechanical developments, technological advancements, an expansion in compensation, an expansion underway costs, changes in producer taxes, subsidies and changes in inflation. A portion of these elements prompts positive changes in total supply while others make total supply decrease.

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