INSTRUCTOR DISCUSSION NOTES:
Has Inflation Turned the Corner?

1. Explain the statement by Mr. Logan that costs might lead to higher prices.

Mr. Logan is referring to what economist call cost-push inflation. This type of inflation occurs when the per unit cost of production rise. When the per unit cost of production rises it squeezes out profit and firms are inclined to raise prices to maintain their profit level. In the current case Mr. Logan correctly identifies a situation where it might not be wise to pass the cost increases on to consumers because their incomes are not keeping pace with inflation and the higher prices could result in lost sales to the business.

2. Discuss why the Fed prefers the core rate of inflation as opposed to the overall rate.

The Fed has long preferred to watch the core rate of inflation because it tends to be a better predictor of economic activity. By taking out the sometimes wildly fluctuating prices of food and energy that can significantly affect the cost of goods a smoother measure of inflation is constructed. The core rate is considered to be a better measure of real inflation as the prices of goods and services rise steadily over time.

Multiple Choice/True False Questions

1.   The measure of core inflation excludes:

  1. housing and energy prices.
  2. energy and durable goods prices.
  3. housing and food prices.
  4. food and energy prices.
      ANS. d

 2.   The Fed defines an acceptable rate of core inflation as between:
  1. 1 and 2 percent.
  2. 2 and 3 percent.
  3. 3 and 4 percent.
  4. 4 and 5 percent.
       ANS. a

©2007  South-Western.  All Rights Reserved   webmaster  |   DISCLAIMER