Brief Outline of Topics Covered in Lecture 12
Chapter 21 Monetary and Fiscal Policy in the IS-LM Model
- The Fed cannot control both i and M simultaneously
- Poole's Pules
- Unstable IS curve
- Unstable LM curve
- The IS-LM model in the long-run
- Natural rate of output
- Monetary and fiscal policy in the short-run and long-run
- The aggregate demand curve
- Derive from IS-LM model
- Slope of aggregate demand curve
- Shifts in the aggregate demand curve
Materials from class:
Video:
Lecture 12 - Chapter 20, pgs. 549-558
Google Video
Additional Reading:
It’s Time to Ask the Next Question, by Mark Thoma, Cato Unbound
Fed's Inflation Analysis Ranks With Zimbabwe's, by Caroline Baum, Bloomberg
Barney Frank: Explicit Inflation Target a "Terrible Mistake"
Bies Says Subprime Mortgage Market is Behaving in a 'Problematic' Way
Application
Consumer Prices Jump 0.2% On Higher Food, Medical Costs, by Jeff Bater, WSJ: Consumer prices and core inflation both rose higher than expected during January, as food costs jumped and medical care posted the biggest increase in 15 years.
The consumer price index rose 0.2%, the Labor Department said Wednesday. The CPI increased 0.4% in December. Core inflation, which is consumer prices excluding food and energy costs, increased by 0.3%, after rising 0.1% during each of the three previous months. Unrounded, the core CPI rose 0.174% in January; it rose 0.256% in December.
The median forecasts of 24 economists surveyed by Dow Jones Newswires were a 0.1% increase in consumer prices overall and a 0.2% increase in the core index.
Federal Reserve Chairman Ben Bernanke told Congress last week that recent economic data support the view that bank policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation. The Fed has kept its federal funds rate steady at 5.25% since last summer but maintained a bias toward higher rates should inflation defy expectations and refuse to moderate. A gauge the bank keeps a keen eye on, the core PCE price index, was up 2.2% in December compared to the same month a year prior, recent data show. The Fed's comfort range for this index is 1.0% to 2.0%. Still, the year-to-year index sat at 2.4% in August, September and October.
Wednesday's CPI report said overall consumer prices were 2.1% higher than a year earlier, on an unadjusted basis. Core prices rose 2.7% in the 12 months ending in January 2007.
Energy prices last month decreased by 1.5%, after going up by 4.2% in December. Gasoline prices last month dropped by a seasonally adjusted 3.0%. Natural gas also fell 3.0%. Electricity prices rose 2.0%. Food prices increased 0.7%, the largest rise since 0.8% in April 2005. Costs climbed for vegetables, fruits and dairy products.
The transportation index was 0.8% lower, as gas prices fell and new vehicle prices were flat. Transportation costs in December increased 1.7%. Medical care prices shot up 0.8%, the largest jump since a matching increase in August 1991.
Housing, which accounts for 40% of the index, rose 0.2%, after rising 0.4% in December. Rent climbed by 0.4% and owners' equivalent rent rose 0.2%. Lodging away from home was up 1.1%. Clothing prices increased 0.3%, while education and communication fell 0.1%. Prices for the category of other goods and services were 0.8% higher in January.
In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, decreased 0.3% in January. Average hourly earnings rose 0.2%. Average weekly hours decreased by 0.3%.
Leading Indicators Move Higher
Meanwhile, an index designed to show the economy's future direction edged up by 0.1% in January to 138.5, according to preliminary estimates by the Conference Board. The Conference Board, a private research group, said Wednesday that its composite index of leading indicators rose in January after an upward-revised 0.6% increase in the prior month.
The January reading for the leading index contrasted with the 0.2% median increase estimate of 22 economists surveyed by Dow Jones Newswires. The index was equal to 100 in 1996.
The Conference Board noted that four of the 10 indicators that make up the leading index showed improvement in January. The largest positive contribution came from the real money supply, followed by the index of consumer expectations, average weekly unemployment insurance claims and stock prices.
The biggest negative contributors, in order, were average weekly manufacturing hours, followed by building permits, manufacturers' new orders for nondefense capital goods, interest rate spread, vendor performance and manufacturers new orders for consumer goods and materials.
Two related indexes included in the Conference Board's report were mixed but underwent only slight changes in January. The composite index of coincident indicators increased by 0.1% to 123.3, after a 0.2% increase in December. The index of lagging indicators slipped by 0.1% in January to 127.6 after a 0.8% increase the month before. The Conference Board is a nonprofit research and business membership group that computes the composite indexes from the U.S. Department of Commerce.
