A manager needs to monitor: Inflation because it can trigger a recession and squeeze economic profits. Monitoring Changes in inflation will help maintain profitability. Inflation data can show varying rates of change on multiple different goods. Monitoring the Federal Reserve worries on inflation will help a manager understand monetary policy changes down the road.
The Phillips Curve shows an inverse correlation between (Inflation) and (Unemployment) using data from 1861 - 1958. It implies the Fed could achieve low unemployment at the cost of high inflation.
The Phillips Curve broke down in the 1970s when Lyndon Johnson inaugurate Great Society social programs while the Fed kept interest rates low.
So is there a trade-off between inflation and unemployment? Milton Friedman and Edmund Phelps says:
The two major takeaways are as follows: 1. The Federal Reserve cannot input policy that reduces inflation long-term, only short. 2. The best and most stable Fed policy is focused on keeping low-inflation.
prices of inputs and outputs
It’s easier to pass on costs increases when the following is true:
Long-term contracts are best when they include price adjustment clauses that are in the best interest for both parties. Specifically for resources such as electric utilities. These contracts can reduce risk for both the buyer and seller. Any and all adjustment clauses should be drafted with care to benefit both parties over ther widest range of eventual outcomes. This protects both parties in the contract because there is no easy solution. drafting a clause that is close half the contract on the price of the cost production and the product itself. This was shown as an example in the book when speaking about coal prices in the 1980’s. by keeping half the contract on cost of production and the other half on value of coal, both parties would’ve seen the contract as valuable.
Though the Consumer Pirce Index is not fully accurate, it shouldn’t be ignored fully rather it should be seen as a teller of rise in inflation rates. Creating custom weighted average systems for business analysis is usually seen as a better system that more appropriately predict inflation. ## Summing up
A business for whom raw materials constitute a major cost should hedge against the risk of sharp increases in the price of raw materials by:
Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
Inflation is the increase in prices of goods in services within an economy.
Measures the average chagne in prices paid by consunmers for a basket of goods and services over time
Measures the average change in the selling prices recieved by domestic produces for output over time.
Concept created by A.W. Phillips that showed inflation and unemployment have both a stable and yet inverse relationship. Economic growth happens but with inflation, leading to more jobs and a lower rate of unemployment.
Measures the percent of a business’s possible output that’s actually being noticed helping businesses see if they are reaching their true levels of production/sales.
The term that defines, slow-growth, high rates of unemployment, and raising consumer prices. Simplified, this can be defined as the relationship between rising inflation and unemployment.
Describe the characteristics of the following events briefly.
The author writes the Phillips Curve broke down in the 1970s. Elaborate. Though American data supported the theory used in the Phillips Curve, policymakers drove inflation and unemployment numbers trough the roof in the 1970’s. The increasing inflation and unemployment numbers created the pattern known as staglflation.