1.Discuss the difference between the overall inflation rate and the "core" inflation rate mentioned in the article. Why would the government differentiate between the two rates? What are the current implications of the differentiation?

The overall inflation rate measures rising price levels that represents all goods and services in the economy. The "core" rate mentioned in the article removes the very volatile components of food and energy which have a tendency to rise and fall rapidly. The Federal Reserves likes to use this core measure of inflation. The argument for ignoring changes in food and energy prices is that although these prices have substantial effects on the overall index, they often are quickly reversed and so do not require a monetary policy response.

2. Use supply and demand to explain why wages increased as employer demand for labor increased.

Students should begin by drawing a labor market in equilibrium. Be sure the students label everything specifically. Explain that when American firms have become optimistic about the economy and decided to expand production, it requires more labor. Additionally, the article reports that mild weather has made it possible for the construction industry to undertake more jobs and have hired more labor. The result in either case is an increase in the demand for labor. This is represented in the graph as a shift to the right (increased demand for labor). Draw in the new curve and have the students label the higher equilibrium wage and quantity. Be sure to discuss the shortage of labor that occurs at the old wage rate when the demand curve shifts to the right. It is this shortage that causes firms to bid the price of labor upward.

©2005  South-Western.  All Rights Reserved   webmaster  |   DISCLAIMER