Analyzing a Wage-Price Spiral

Analyzing Inflationary Pressures from Market Structure Changes

Consider an economy described by the wage-setting (WS) and price-setting (PS) framework, initially experiencing a stable price level. A new government policy significantly weakens the power of labor unions in wage negotiations. Based on this framework, what is the most likely dynamic that will unfold regarding the general price level?

An economy is operating at its medium-run equilibrium with a stable price level. Suppose that workers begin to expect a higher rate of inflation and, as a result, successfully bargain for higher nominal wages. According to the wage-setting/price-setting framework, arrange the following events in the correct chronological sequence to describe the resulting inflationary process.

Analyzing an Inflationary Supply Shock