EXAMPLE 4

Read this short article from cnn.com. Analyze the article by identifying the determinants of AD and/or AS that have changed. Then graph the changes on the AS-AD model. Finally use your graph to discuss has happened to UE, IN, and EG. Send your answers to me using the form below.

http://cgi.cnnfn.com/output/pfv/2000/05/30/economy/confidence/

 

Confidence surges in May

U.S. consumer confidence index jumps to 144.4; second-highest level ever

By Staff Writer M. Corey Goldman May 30, 2000: 11:26 a.m. ET NEW YORK (CNNfn) - U.S. consumer confidence gathered steam for the first time in four months in May, rising to a near record despite higher interest rates and stock market volatility that were widely expected to deter consumers from prying open their wallets. . . . . . . "With unemployment at a 30-year low and the short-term Conference Board forecast projecting favorable labor market conditions, confidence is expected to remain strong through the summer," said Lynn Franco, director of the board's consumer research center. "Volatile financial markets and interest rate hikes are not expected to have a significant impact." . . . . . . What both Franco and other economists immediately pointed to was the tight U.S. labor market, which has created a shortage of skilled workers in almost every industry and prompted companies to start paying their workers more in salaries and benefits -- a situation that can trigger inflation. . . . . . .

ANSWER:

Initially at full employment:
"With unemployment at a 30-year low . . . "

DETERMINANTS: C, MS, Resource Prices(?)

C
consumer expectations
consumer confidence gathered steam
Expected future Income ­ Þ ­ C today Þ ­ AD today

But the article doesn't mention any increase in inflation as we would expect. This is at least partly due to the second determinant.

MS
"despite higher interest rates"
MS ¯ Þ ­ Interest Rates Þ I ¯ Þ¯ AD

Finally, the article mentions a possible change in AS:
Price of Resources
"a shortage of skilled workers in almost every industry and prompted companies to start paying their workers more in salaries and benefits"
price of resources ­ Þ ¯ AS

As the article says, this is " a situation that can trigger inflation."

Why isn't there any inflation then? What the article doesn't tell us is why we currently have low unemployment and low inflation. The explanation is an increase in AS due to improved productivity.

changes in the productivity of resource
productivity ­ Þ ­ AS