Consequences of a Positive Demand Shock without an Inflation Target
In an economy that lacks the discipline of an inflation target, a positive demand shock can lead to persistently higher inflation. Without a policy anchor, inflationary expectations adjust upwards with each round of wage and price setting. This process causes an upward drift in inflation that can become embedded in the economic system, remaining high even after the initial demand shock has subsided.
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Introduction to Macroeconomics Course
Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
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Consequences of a Positive Demand Shock without an Inflation Target
Consider two economies, A and B, that are identical except for their monetary policy frameworks. Both experience a sudden, significant increase in consumer spending. In Economy A, the central bank has a well-known and credible long-term goal for maintaining low and stable price increases. In Economy B, the central bank has no explicit long-term goal for price stability, and its policy actions are less predictable. What is the most likely difference in the inflationary outcome between the two economies in the medium term, after the initial effects of the spending increase?
Monetary Policy Framework and Economic Shocks
An economy operates without a publicly announced, credible long-term goal for price stability. It experiences a sudden and large positive shock to aggregate demand (e.g., a government spending boom). Arrange the following economic events in the most likely causal sequence that would follow this shock.
Monetary Policy Frameworks and Demand Shocks
An economy experiences a sudden, positive aggregate demand shock (e.g., a surge in consumer confidence). Match each monetary policy framework below with its most likely medium-term outcome following this shock.
Inflationary Dynamics after a Demand Shock
In an economy that operates without a credible, publicly-known long-term goal for price stability, a sudden, positive shock to aggregate demand will cause a temporary increase in inflation that naturally returns to its pre-shock level once the initial demand pressure subsides.
In an economy lacking a credible, long-term goal for price stability, a positive aggregate demand shock can cause inflation expectations to become __________, leading to a persistent upward drift in the inflation rate even after the initial shock has dissipated.
Monetary Policy Framework and Economic Shocks
Evaluating Monetary Policy in the Absence of an Inflation Target
Learn After
Implications of Persistent Inflation Differentials for the Nominal Exchange Rate
Figure 7.7: Diagram of a Positive Demand Shock in an Economy without an Inflation Target (Spain Example)
In an economy where the central bank does not follow a publicly stated goal for the rate of price increases, a large, unexpected surge in household consumption occurs. According to the principles of wage and price setting, why might the rate of inflation continue to accelerate in subsequent periods, even after the initial consumption surge has ended?
An economy without a formal, credible policy to control the rate of price increases experiences a sudden, large increase in aggregate demand. Arrange the following events in the most likely chronological order to illustrate the resulting economic process.
Analyzing Persistent Inflation in a Hypothetical Economy
The Wage-Price Spiral without a Policy Anchor
Persistence of Inflation after a Temporary Shock
In an economy that lacks a credible, publicly announced policy for controlling the rate of price increases, a temporary positive shock to aggregate demand will cause a temporary rise in inflation that naturally returns to its original level once the shock has dissipated.
In an economy without a formal policy to stabilize the rate of price increases, a sudden, sustained rise in aggregate demand occurs. Match each economic phenomenon to its corresponding description within this specific context.
An economy, which does not have a formal policy to maintain a specific rate of price increases, experiences a large, temporary surge in export demand. This initially causes both production and the rate of price increases to rise. In the subsequent periods, after the export demand has returned to normal, what is the most likely outcome for the rate of price increases if firms and workers base their future wage and price decisions on the most recent inflation trends?
An economy initially has a stable 2% rate of price increases. It then experiences a one-year surge in export sales, which causes the rate of price increases to jump to 5%. In the year after the export surge has ended and sales have returned to their original level, the rate of price increases accelerates further to 6%. Which of the following provides the most direct explanation for the continued acceleration of price increases in the second year, assuming no formal policy to control the rate of price increases is in place?
Evaluating Competing Explanations for Persistent Inflation