Why Does Whirlpool Care about Monetary Policy?

2. Why Does Whirlpool Care about Monetary Policy? Learning Objectives In 2007, Whirlpool, headquartered in Benton Harbor, Michigan, had 73,000 employees and $19 billion in annual sales. In 2001 and the following years, Whirlpool clearly benefited from the effects of monetary policy.

3. Learning Objective 28.1 The Discovery of the Short-Run Trade-offbetween Unemployment and Inflation Phillips curve A curve showing the short-run relationship between the unemployment rate and the inflation rate. FIGURE 28.1 The Phillips Curve

4. Learning Objective 28.1 The Discovery of the Short-Run Trade-offbetween Unemployment and Inflation Explaining the Phillips Curve with Aggregate Demand and Aggregate Supply Curves FIGURE 28.2 Using Aggregate Demand and Aggregate Supply to Explain the Phillips Curve

5. Learning Objective 28.1 The Discovery of the Short-Run Trade-offbetween Unemployment and Inflation Is the Phillips Curve a Policy Menu? Structural relationship A relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods. Is the Short-Run Phillips Curve Stable? During the 1960s, the basic Phillips curve relationship seemed to hold because a stable trade-off appeared to exist between unemployment and inflation. Then in 1968, in his presidential address to the American Economic Association, Milton Friedman of the University of Chicago argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation.

6. Learning Objective 28.1 The Discovery of the Short-Run Trade-offbetween Unemployment and Inflation The Long-Run Phillips Curve Natural rate of unemployment The unemployment rate that exists when the economy is at potential GDP.

7. Learning Objective 28.1 The Discovery of the Short-Run Trade-offbetween Unemployment and Inflation The Long-Run Phillips Curve FIGURE 28.3 A Vertical Long-Run Aggregate Supply Curve Means a Vertical Long-Run Phillips Curve

8. Learning Objective 28.1 The Discovery of the Short-Run Trade-offbetween Unemployment and Inflation The Role of Expectations of Future Inflation Table 28-1 The Impact of Unexpected Price Level Changes on the Real Wage

9. Learning Objective 28.1 The Discovery of the Short-Run Trade-offbetween Unemployment and Inflation The Role of Expectations of Future Inflation Table 28-2 The Basis for the Short-Run Phillips Curve

10. Learning Objective 28.1 MakingtheConnection • Do Workers Understand Inflation? Will her wage increases keep up with inflation?

11. Learning Objective 28.2 The Short-Run and Long-Run Phillips Curves FIGURE 28.4 The Short-Run Phillips Curve of the 1960s and the Long-Run Phillips Curve

12. Learning Objective 28.2 The Short-Run and Long-Run Phillips Curves Shifts in the Short-Run Phillips Curve FIGURE 28.5 Expectations and the Short-Run Phillips Curve

13. Learning Objective 28.2 The Short-Run and Long-Run Phillips Curves Shifts in the Short-Run Phillips Curve FIGURE 28.6 A Short-Run Phillips Curve for Every Expected Inflation Rate

14. Learning Objective 28.2 The Short-Run and Long-Run Phillips Curves How Does a Vertical Long-Run Phillips Curve Affect Monetary Policy? FIGURE 28.7 The Inflation Rate and the Natural Rate of Unemployment in the Long Run

15. Learning Objective 28.2 The Short-Run and Long-Run Phillips Curves How Does a Vertical Long-Run Phillips Curve Affect Monetary Policy? Nonaccelerating inflation rate of unemployment (NAIRU) The unemployment rate at which the inflation rate has no tendency to increase or decrease.

16. Learning Objective 28.2 MakingtheConnection • Does the Natural Rate of Unemployment Ever Change? Frictional or structural unemployment can change—thereby changing the natural rate—for several reasons: • Demographic changes. • Labor market institutions. • Past high rates of unemployment. What makes the natural rate of unemployment increase or decrease?

17. Learning Objective 28.2 28-2 Solved Problem Changing Views of the Phillips Curve Writing in a Federal Reserve publication, Bennett McCallum, an economist at Carnegie Mellon University, argues that during the 1970s, the Fed was “acting under the influence of 1960s academic ideas that posited the existence of a long-run and exploitable Phillips-type tradeoff between inflation and unemployment rates.”

18. Learning Objective 28.3 Expectations of the Inflation Rate and Monetary Policy The experience in the United States over the past 50 years indicates that how workers and firms adjust their expectations of inflation depends on how high the inflation rate is. There are three possibilities: • Low inflation. • Moderate but stable inflation. • High and unstable inflation. Rational expectations Expectations formed by using all available information about an economic variable.

19. Learning Objective 28.3 Expectations of the Inflation Rate and Monetary Policy The Effect of Rational Expectations on Monetary Policy FIGURE 28.8 Rational Expectations and the Phillips Curve

20. Learning Objective 28.3 Expectations of the Inflation Rate and Monetary Policy Is the Short-Run Phillips Curve Really Vertical? • Many economists have remained skeptical of the argument that the short-run Phillips curve is vertical. The two main objections raised are that • workers and firms actually may not have rational expectations, and • the rapid adjustment of wages and prices needed for the short-run Phillips curve to be vertical will not actually take place. Real Business Cycle Models Real business cycle models Models that focus on real rather than monetary explanations of fluctuations in real GDP.

21. Learning Objective 28.4 How the Fed Fights Inflation The Effect of a Supply Shock on the Phillips Curve FIGURE 28.9 A Supply Shock Shifts the SRAS and the Short-Run Phillips Curve

22. Learning Objective 28.4 How the Fed Fights Inflation Paul Volcker and Disinflation FIGURE 28.10 The Fed Tames Inflation, 1979–1989

23. Learning Objective 28.4 How the Fed Fights Inflation Paul Volcker and Disinflation Disinflation A significant reduction in the inflation rate. Don’t Let This Happen to YOU!Don’t Confuse Disinflation with Deflation

24. Learning Objective 28.4 28-4 Solved Problem Using Monetary Policy to Lower the Inflation Rate

25. Learning Objective 28.4 How the Fed Fights Inflation Alan Greenspan and the Importance of a Credible Monetary Policy Table 28-3 The Record of Fed Chairmen and Inflation

26. Learning Objective 28.4 How the Fed Fights Inflation De-emphasizing the Money Supply The Importance of Fed Credibility The Fed learned an important lesson during the1970s: Workers, firms, and investors in stock and bond markets have to view Fed announcements as credible if monetary policy is to be effective.

27. Learning Objective 28.4 How the Fed Fights Inflation Monetary Policy Credibility after Greenspan Debate continues over policies to increase the Fed’s credibility. Some economists and policymakers believe that central banks are more credible if they adopt and follow rules. Economists and policymakers who oppose the rules strategy support a discretion strategy for monetary policy Many economists believe a middle course between a rules strategy and a discretion strategy is desirable. Most economists believe the best way to achieve commitment to rules is to remove political pressures on the central bank.

28. Learning Objective 28.4 How the Fed Fights Inflation Federal Reserve Policy and Whirlpool’s “Pricing Power” The success of any firm, particularly a firm like Whirlpool that produces consumer durables, will be determined partly by its ability to compete against rival firms and partly by macroeconomic conditions.

29. LOOK An Inside The Fed Rethinks the Phillips Curve Policy Makers at Fed Rethink Inflation’s Roots The short- and long-run Phillips curves.

30. K e y T e r m s Disinflation Natural rate of unemployment Nonaccelerating inflation rate of unemployment (NAIRU) Phillips curve Rational expectations Real business cycle models Structural relationship