, although the rate of pass - through of higher energy and other commodity prices to core consumer price inflation appears to have remained relatively low in the current episode - reflecting the inflation - fighting credibility built by the fed in recent decades the cumulative increases in energy and commodity prices have been large enough that they could account for some of the recent pickup in core inflation. in addition, some survey - based measures of longer - term inflation expectations have edged up, on net, in recent months, as has the compensation for inflation and inflation risk implied by yields on nominal and inflation - indexed government debt. as yet, these expectations measures have remained within the ranges in which they have fluctuated in recent years and inflation compensation implied by yields on government debt has fallen back somewhat in the past month. nevertheless, these developments bear watching. in conclusion, energy prices have moved up considerably since the end of 2002, reflecting supply and demand factors. in the short run, prices are likely to remain high in an environment of strong world economic growth and a limited ability to increase energy supplies. moreover, prices are likely to be volatile in the near term, given the small margins of excess capacity to produce crude oil or natural gas that traditionally have buffered short - run shifts in supply and demand. however, in the long run, market forces will respond. the higher relative prices of energy will create incentives for businesses to create new, energy - saving technologies and for energy consumers to adopt them. the market for alternative fuels is growing rapidly and will help to shift consumption away from petroleum - based fuels. government can contribute to these conservation efforts by working to create a regulatory environment that encourages the growth in energy supplies in a manner that is consistent with our nation's environmental and other objectives. given the extraordinary resilience of the u. s. economy, i am confident our nation will be up to this challenge.

population of firms and consumers to 1, the equilibrium will occur when the demand equals the supply ( y = d ). in equilibrium under rational expectations, product must be equal to expected product, or : y = d ( y, σ ) now, with a couple more assumptions we can find the equilibrium ( figure 2 ). the equilibrium is unique in a. for this, the demand is assumed to be concave, that is, any additional demand for goods is smaller as income increases. to ensure a unique equilibrium we assume that, for ey = 0, the demand for the good is positive. this can be understood as the individual having another source of income and expenses, and always wanting to devote part of the other income to consume this good. another simple way of seeing it is to think that the individual will want to borrow to acquire this good, even if her income is very low, presumably because she always expects to have the funds available in the future to repay. as we will see, however, it is possible that multiple equilibria exist, with low and high output, as a result of coordination failures. uncertainty and the value of waiting decision making under uncertainty has always been a complex thing to study. often to simplify, we turn to quadratic specifications in order to use certainty equivalence. surely this this exercise is based on an mit class exercise which, despite having saved my notes and after a number of inquiries with friends, i have been unable to find. the original model was somewhat more complex because it assumed strategic interactions among firms, and here the demand is only taken as given. more formal models were developed in cooper and john ( 1988 ). for a thorough review of this literature, see cooper ( 1999 ). note that because this is only an illustration, many aspects were left out of the analysis. in this case we are assuming that there is some friction in the price - setting mechanism that prevents firms from selling all they want at a given price. this friction may come from firms deciding how much to produce before they know the demand, which would lead us to incorporate the producers ’ decisions to this story. analytically, however, it would not change much. falls short of describing the much more complex reality ; for example, when the analysis considers decisions to invest or consume ( durables ) in the presence of irreversibilities. 3 when a decision is irreversible, there is no chance to back out ; for example, an investment