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.

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

  $\begin{array}{l}\text{Change in Price of Barrel of Oil }\equiv \underset{\_}{{\text{PBO}}_2{\text{-PBO}}_1}\\ {\text{ PBO}}_1\\ \end{array}$

[of a quarter of current year w.r.t to the prior quarter of previous year]

  $\begin{array}{l}\text{Change in Inflation Expectations }\equiv \underset{\_}{{\text{IE}}_2{\text{-IE}}_1}\\ {\text{ IE}}_1\\ \end{array}$

[of a quarter of current year w.r.t to the prior quarter of previous year]

  $\begin{array}{l}\text{Change in Inflation Rate }\equiv \underset{\_}{{\text{PCEPI}}_2{\text{-PCEPI}}_1}\times 100\\ {\text{ PCEPI}}_1\\ \end{array}$ [of a quarter of current year w.r.t to the prior quarter of previous year]

  $\begin{array}{l}\text{NWAP }\equiv \text{ Compensation - Productivity}\\ \\ \end{array}$

  $\begin{array}{l}\text{Change in NWAP }\equiv \underset{\_}{{\text{NWAP}}_2{\text{-NWAP}}_1}\times 100\\ {\text{ NWAP}}_1\\ \end{array}$ [of a quarter of current year w.r.t to the prior quarter of previous year]

Spreadsheet:

Year	PCE	Change in Levels of PCE	Change in Inflation Rate %	Comp.	Prod.	NWAP	Change in Level of NWAP	Change in Level of NWAP %	PBO	Change in Level of PBO	Change in Level of PBO %	IE	Change in Level of IE	Change in Level of IE %
2016 Q1 jan	109.9			103.4	106.4	-3			31.6			2.5
2016 Q2 apr	110.5			103.9	106.6	-2.7			40.7			2.8
2016 Q3 july	111			104.1	107.3	-3.2			44.6			2.7
2016 Q4 oct	111.5			102.2	107.6	-5.4			49.7			2.4
2017 Q1 jan	112.1	2.2	2.00	102.7	107.6	-4.9	-1.9	63.33	52.5	20.9	66.14	2.6	0.1	4.00
2017 Q2 apr	112.2	1.7	1.54	102.8	108.1	-5.3	-2.6	96.30	51	10.3	25.31	2.5	-0.3	-10.71
2017 Q3 july	112.6	1.6	1.44	103.2	108.8	-5.6	-2.4	75.00	46.6	2	4.48	2.6	-0.1	-3.70
2017 Q4 oct	113.4	1.9	1.70	103	108.9	-5.9	-0.5	9.26	51.5	1.8	3.62	2.4	0	0.00

*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.

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.