Analyzing Labor Market Shocks
Given the economic scenario described below, identify which curve in the wage-setting/price-setting model is directly affected, the direction of its shift, and provide the economic reasoning for this change.
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Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Consider two separate economic events: (1) a nationwide increase in the market power of firms, allowing them to charge higher markups over their costs, and (2) the passage of new legislation that significantly enhances workers' employment protections, making it more difficult to dismiss them. Within the standard wage-setting (WS) and price-setting (PS) framework, what are the respective effects of these two events?
Analyzing Labor Market Shocks
Match each economic shock to its direct, initial effect within the wage-setting (WS) and price-setting (PS) framework, which models the determination of the equilibrium real wage and unemployment rate.
Analyzing Labor Market Shocks
In the wage-setting/price-setting model of the labor market, any event that triggers cost-push inflation, such as a sudden increase in the global price of oil or a government policy that strengthens workers' collective bargaining rights, operates through the same mechanism: a downward shift of the price-setting (PS) curve.
Contrasting Cost-Push Inflation Shocks
Discerning the Source of Stagflation
An economy is initially at its medium-run equilibrium. A sudden, sharp, and persistent increase in the global price of a key imported raw material occurs. According to the wage-setting (WS) and price-setting (PS) model, arrange the following events in the logical sequence that describes the economy's adjustment to a new medium-run equilibrium.
An economy experiences a significant and permanent increase in the market power of firms, allowing them to set higher price markups over their production costs. Within the wage-setting (WS) and price-setting (PS) framework, what is the ultimate effect of this change on the labor market's medium-run equilibrium?
An economy experiences a significant, permanent increase in the legislated minimum wage, raising it above the market-clearing level for low-skilled workers. Within the wage-setting (WS) and price-setting (PS) framework, which statement best analyzes the direct, initial impact of this policy?
Sources of Cost-Push Inflation