Central Bank's Mechanism to Halt Supply-Shock Inflation
To prevent inflation from accelerating after a negative supply shock, a central bank with an inflation-targeting mandate must eliminate the resulting positive bargaining gap. The policy mechanism to achieve this involves reducing aggregate demand. This contraction in demand leads to a fall in employment, which closes the bargaining gap and removes the underlying pressure for further price increases.
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Related
Central Bank's Mechanism to Halt Supply-Shock Inflation
Figure 5.13: An Inflationary Supply Shock
The Necessity of a Costly Recession to Counter Unanchored Expectations After a Supply Shock
Central Bank Policy Dilemma After a Supply Shock
An economy experiences a sudden, sharp increase in the price of all imported raw materials, leading to higher production costs for most businesses. In response, the central bank announces it will prioritize maintaining the current level of employment and will avoid any immediate actions that might slow down the economy. Based on this policy choice, what is the most significant risk the central bank is accepting?
Evaluating a Central Bank's Policy Response to a Supply Shock
An economy, initially at a stable rate of inflation and employment, is hit by a severe drought that drastically reduces agricultural output and pushes up food prices. Fearing that this price spike will lead to widespread, persistent inflation, the central bank immediately implements a very aggressive policy of raising interest rates significantly. Which of the following outcomes is the most significant risk associated with the central bank's aggressive action?
The Role of Central Bank Credibility in Anchoring Inflation Expectations
The Challenge of Economic Forecasting for Policymakers
Learn After
Using the Policy Interest Rate to Counter Supply-Shock Inflation
Central Bank Response to an Economic Shock
An economy experiences a sudden, sharp increase in the price of imported energy, leading to higher production costs for many firms and a rise in the general price level. If the central bank's primary mandate is to prevent this one-time price increase from developing into a persistent, accelerating wage-price spiral, which of the following describes the necessary policy adjustment and its direct effect on the labor market?
Analyzing a Central Bank's Response to a Supply Shock
Following a negative supply-side shock that pushes prices up, an inflation-targeting central bank intervenes to prevent a persistent wage-price spiral. Arrange the following events in the correct causal order to show how the central bank's policy works to stabilize inflation.
When an economy is hit by a negative supply shock, an inflation-targeting central bank can prevent a wage-price spiral from developing by reducing aggregate demand, a process that can be accomplished without any negative impact on the level of employment.
The Labor Market Link in Inflation Control
An economy experiences a widespread, unexpected increase in production costs, leading to a rise in the general price level. An inflation-targeting central bank intervenes to prevent this from turning into a persistent wage-price spiral. Match each component of this economic scenario with its correct description.
An economy is hit by an adverse supply-side event, causing an initial jump in prices. An inflation-targeting central bank decides to implement a policy that reduces overall spending in the economy. What is the primary economic rationale for this action as a method to prevent sustained inflation?
Following an unexpected event that raises production costs across an economy, an inflation-targeting central bank will enact policies to reduce overall economic demand. This reduction in demand is intended to cause a temporary fall in employment, which in turn eliminates the positive __________ and halts the pressure for further price rises.
Evaluating a Central Bank's Inflation-Fighting Strategy