A manager needs to monitor:
The Phillips Curve shows an inverse correlation between (Unemployment) and (Inflation) 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:
Describe major takeaways briefly.
If there is no short-run trade off between inflation and unemployment, there might still be a long-term cost to high inflation. High inflation rates can lead to volatile inflation rates.. With volatile levels high, it creates issues for business planning. The new economic theory states that the Federal Reserve cannot reduce unemployment, except temporarily and low inflation is preferable to high inflation.
prices of inputs and outputs
Pricing cycles have two types of risks. The first being an industry cycle where there is over investment in productive capacity tends to lead to low prices for finished products. The second is the costs of raw materials rising faster than the prices of finished products.
Itβs easier to pass on costs increases when the following is true:
Describe major takeaways briefly.
Long-term contracts sometimes have price adjustment clauses that are based on inflation measures where it helps benefit both parties. Over time, it can be difficult to know what price will make both parties better off than without any deal. Inflation adjustments should be written with the government data release specified explicitly. The problem with inflation adjustments is the cost of production versus the value of the product.
Describe major takeaways briefly.
Newspapers report inflation when someone complains that the CPI fails to properly measure living costs. Then consumers are leaded to believe that inflation is higher than the report states. CPI may not measure inflation accurately, but we should not think there are sharp swings in the error rate.
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.
Rising prices across the entire market. Consumer prices, wholesale goods, wages, assests, etc are increased in price.Expressed as an annual percentage rate of change on an index number.
Goods and services that are bought by urban consumers. Examples could be health care services or bread in a grocery store.
Goods sold by manufacturers and are ready for the end users. An example of end users would be a supermarket. This is the process of PPI finished goods. PPI take materials and goes through different stages to help complete the processing of the product to be sold in the end.
An economist, A. W. H. Phillips took over the thought process of inflation in the 1960s when he published a paper discussing the correlation of unemployment and inflation. He found an inverse correlation.
The amount an economy can produce using the current equipment, workers, and capital. Measuring how close a company is to reaching full capacity is crucial to monetary policy.
Created during the 1970s for the twin economic problems of stagnation and the increase in inflation.
Describe the characteristics of the following events briefly.
The author writes the Phillips Curve broke down in the 1970s. Elaborate.
Created a new way of pondering about inflation. If we want low inflation, we need to tolerate high employment. With the data he concluded an inverse correlation. If we want low employment, then we need to tolerate high inflation. With Phillips logic of inflation, it lead to a pattern known as stagflation. But in the long-run there is no trade off between unemployment and inflation. There is however a trade off between unemployment and unanticipated inflation.