THE CASE STUDY

It's a good time to ask the question again. Policies of the Federal Reserve in concert with those of the recent administration produced results (prior to the pandemic) that challenge traditional economic theory centered on the so-called Phillips curve. It's a simple economic model named after the economist who explored the positive relationship between low unemployment and higher wage rates. It was a short step to correlate, without proving causality, higher wage rates and inflation, and therefore low unemployment and inflation.

One way to think about the model is that nirvana is the point at which the economic benefits of lower unemployment no longer exceed the economic penalties of inflation, however those might be calculated. This thinking contributed to what came to be regarded as a target unemployment rate, with anything less causing excessive inflation. At one time, many economists thought this to be as high as 6 percent.

The Phillips curve has taken its lumps over the years. No fewer than seven distinguished economists have won Nobel Prizes for revising or proving shortcomings in the model. Nevertheless, it continues to influence fiscal and monetary policy across the globe from time to time.

"DID THE ECONOMIC EXPERIMENT IN THE UNITED STATES DURING THE PAST FOUR YEARS SHOW US A FEW THINGS?"

But then the US economic policy of the past four years came along. It brought tax cuts and higher growth. The unemployment rate fell. Wages, particularly for low-income workers, increased. But contrary to Phillips curve thinking, inflation remained the same or even declined. Even as unemployment fell below 4 percent prior to the COVID-19 pandemic, the inflation rate continued to hold or even decline.

Did the economic experiment in the United States during the past four years show us a few things? Perhaps under the right conditions, long-held assumptions just aren't valid?

What are some of those pre-pandemic conditions? Did gains from information technology that we have been expecting for several decades finally kick in, producing larger-than-expected productivity gains to fuel both higher wages and higher profits? How important was the loosening of regulations on business? How much did Federal Reserve policiespumping enough money into the economy to maintain low interest rates, supporting business growth and lower borrowing costshelp? Should we be surprised that economic growth, at least in terms of how we measure it, increased without attendant inflation?

Did we learn some economic lessons in recent years? For example, under the right conditions, is inflation relatively insensitive to wages and unemployment? Over what range of unemployment ratessay, anywhere from 3 to 5 percentdoes this apply? Can we pump trillions of deficit-increasing money into the economy without triggering excessive inflation? What if we spent some of it on added training to fight so-called structural unemployment of workers with the wrong skills for our future economy? With that, could we reduce unemployment to less than 3 percent with little or no inflation?

Or is significantly higher inflation just over the horizon? After all, there is at least a lull in globalization. China's economic development has increased its costs of production and reduced international price competition. Outsourcing may have seen the end of its rapid growth. And workers may belatedly be gaining wage leverage with very low unemployment rates. Savings have accumulated in the US to the point that they could fuel demand that outpaces supply, increasing inflation. Extended ultra-low interest rates may promote all kinds of unwise financial decisions and volatility.

Has the new economy finally arrived? What do you think?

Share your insights in the comments below.It's a good time to ask the question again. Policies of the Federal Reserve in concert with those of the recent administration produced results (prior to the pandemic) that challenge traditional economic theory centered on the so-called Phillips curve. It's a simple economic model named after the economist who explored the positive relationship between low unemployment and higher wage rates. It was a short step to correlate, without proving causality, higher wage rates and inflation, and therefore low unemployment and inflation.

One way to think about the model is that nirvana is the point at which the economic benefits of lower unemployment no longer exceed the economic penalties of inflation, however those might be calculated. This thinking contributed to what came to be regarded as a target unemployment rate, with anything less causing excessive inflation. At one time, many economists thought this to be as high as 6 percent.

The Phillips curve has taken its lumps over the years. No fewer than seven distinguished economists have won Nobel Prizes for revising or proving shortcomings in the model. Nevertheless, it continues to influence fiscal and monetary policy across the globe from time to time.

"DID THE ECONOMIC EXPERIMENT IN THE UNITED STATES DURING THE PAST FOUR YEARS SHOW US A FEW THINGS?"

But then the US economic policy of the past four years came along. It brought tax cuts and higher growth. The unemployment rate fell. Wages, particularly for low-income workers, increased. But contrary to Phillips curve thinking, inflation remained the same or even declined. Even as unemployment fell below 4 percent prior to the COVID-19 pandemic, the inflation rate continued to hold or even decline.

Did the economic experiment in the United States during the past four years show us a few things? Perhaps under the right conditions, long-held assumptions just aren't valid?

What are some of those pre-pandemic conditions? Did gains from information technology that we have been expecting for several decades finally kick in, producing larger-than-expected productivity gains to fuel both higher wages and higher profits? How important was the loosening of regulations on business? How much did Federal Reserve policiespumping enough money into the economy to maintain low interest rates, supporting business growth and lower borrowing costshelp? Should we be surprised that economic growth, at least in terms of how we measure it, increased without attendant inflation?

Did we learn some economic lessons in recent years? For example, under the right conditions, is inflation relatively insensitive to wages and unemployment? Over what range of unemployment ratessay, anywhere from 3 to 5 percentdoes this apply? Can we pump trillions of deficit-increasing money into the economy without triggering excessive inflation? What if we spent some of it on added training to fight so-called structural unemployment of workers with the wrong skills for our future economy? With that, could we reduce unemployment to less than 3 percent with little or no inflation?

Or is significantly higher inflation just over the horizon? After all, there is at least a lull in globalization. China's economic development has increased its costs of production and reduced international price competition. Outsourcing may have seen the end of its rapid growth. And workers may belatedly be gaining wage leverage with very low unemployment rates. Savings have accumulated in the US to the point that they could fuel demand that outpaces supply, increasing inflation. Extended ultra-low interest rates may promote all kinds of unwise financial decisions and volatility.

Has the new economy finally arrived? What do you think?

Share your insights in the comments below.

Question 8.

1.Assume (, ) = 4()0.5 + 10. What is the Bordering Rate of Replacement of y for x when x=2 and y=4?

2.Justify the statement The government puts a price ceiling on the cost of a large pizza. Consumers will loose from this policy.

3.All goods, normal or inferior, satisfy the Law of Demand discuss the question if it is true or false.

4.Rahul and Juan are the only consumers in the market for root beer in a small town in Nova Scotia. Their demand curves are given by P=30-2Qi and P=60-2Qj, where Qi and Qj are the quantities demanded by Rahul and Juan, respectively. What is the market demand curve for root beer in their town?

5.Nadia likes pork Ribs (R) and Chicken wings (C). Her utility function is (, ) = 102. Her weekly income is $90 which she spends exclusively on R and C. The price for a slab of ribs is $10 and $5 for a piece chicken. (Answer parts a to f).

a. State in words and in math Nadia's consumer problem

(b) What is Nadia's optimal bundle?

(c) What is her demand function for ribs?

(d) Are ribs a normal or inferior good?

6. The price of ribs falls to 5$. Draw the income and substitution effects of this price change graphically. Assume ribs are on the horizontal axis.

7. What would Nadia's optimal bundle be if her utility function was given by = + ? Assume the price for a slab of ribs is $10 and $5 for chicken