1. Discuss the notion of energy prices seeping into the prices of other products.

This notion is 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. Thus, the higher price of energy has seeped into the prices of other goods which requires energy as an input in the production process.

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 obtained. The core rate is considered to be a better measure of real inflation as the prices of goods and services rise steadily over time as opposed to the violent ups and downs that can occur in the overall rate.

Multiple Choice/True False Questions