Reports that the rate of unemployment is lower than expected is frequently (not always) treated as bad news on Wall Street.  In particular, bond and stock prices frequently fall in response to unexpectedly low unemployment rates.  In addition, the Federal Reserve and other market participants seem to view news of low unemployment and robust growth as indicative of inflationary pressures in the economy while rising unemployment and slowing growth seems to indicate that inflation is under control.

Suppose you are an intern at the White House.   The President’s Chief of Staff — who knows that you are taking an advanced undergraduate course in Monetary Theory and Policy — has asked you to prepare a paper to brief the President on the seemingly anomalous response of stock prices to “good news”.  Given the considerable time pressures the Senator must contend with, his Chief of Staff insists that the paper should not exceed five (5) double spaced typed pages and should be written in a way that is accessible to the President whose knowledge of economics has depreciated to that of someone whose exposure to economics is limited to taking principles of micro and macroeconomics in college.

Write a short paper that carefully identifies, summarizes, and critically evaluates the theoretical and empirical case for the view underlying the attitudes described above.  To be complete, your paper should explain why stock and bond prices sometimes fall in response to good economic news.  The articles by Cogley and by Boyd et. al. (listed below and in the folder titled Stock Prices, Unemployment, and Inflation) should be very helpful on this issue and contains clues as to why the other articles are germane to understanding why unexpectedly low rates of unemployment lead to the expectation of higher inflation.

The articles listed below represent a list of articles you should consult in preparing your paper. At a minimum your paper should leave me convinced that you thoroughly understand the issues addressed in these articles.  However, if the issues involved lead you to other literature, you are strongly encouraged to follow such leads.   The literature in the folder is literature not exhaustive and is intended to give you a start.  It is your job to do as much research as it takes to write an informative and carefully reasoned paper on this subject.  The quality and depth of the research underlying your paper will be an important determinant of your grade.  As such it is important that you write a paper that convinces me that you did your research.  In addition, it is very important for you to cite and reference the literature you rely upon.

Your paper should be professionally presented and should include no more than 5 double-spaced typed pages of text (approximately 1500 words), and a separate page of references.  For the purposes of this assignment you are not allowed to use verbatim quotes.  If you want to include an author’s comments, you should paraphrase and make sure that you properly attribute the thoughts you are paraphrasing to the original author.

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