Analyzing an Inflationary Shock

Analyzing an Inflationary Trigger

An economy is in a stable equilibrium with a constant, positive rate of inflation. Which of the following events would most likely be an initial trigger for an increase in the inflation rate?

An economy is operating at its inflation-stabilizing rate of unemployment, where the inflation rate is constant. A sudden, permanent increase in the bargaining power of firms allows them to set higher prices relative to their costs. What is the most likely immediate consequence of this change?

Explaining an Inflationary Trigger

True or False: In an economy initially at a stable equilibrium with a constant rate of inflation, a sudden and sustained increase in aggregate demand will cause the economy to immediately settle into a new, stable equilibrium at a higher, but constant, rate of inflation.

An economy is initially in a stable equilibrium with a constant, positive rate of inflation. A sudden, sustained increase in the bargaining power of workers then occurs. Arrange the following events in the logical sequence that describes the resulting inflationary process.

An economy is in a stable equilibrium with a constant, positive rate of inflation. Match each economic shock described below with its most direct, immediate consequence that initiates a rise in inflation.

In an economy at its inflation-stabilizing rate of unemployment, a positive aggregate demand shock that pushes unemployment below the equilibrium level will initially lead to an increase in the bargaining power of ______, triggering a rise in inflation.

Evaluating a Policy Response to an Inflationary Shock