Deriving the Phillips Curve from the WS-PS Model with Positive Expected Inflation
The Phillips curve can be derived from the WS-PS model even when inflation expectations are positive. The process begins at the supply-side equilibrium (point A), where unemployment is at its structural rate (e.g., 6%) and the actual inflation rate matches the expected rate (e.g., 3%). During a business upswing, increased aggregate demand can lower unemployment to, for instance, 4% (point B). At this point, workers anticipate 3% inflation and demand a corresponding 3% nominal wage increase to maintain their real wage. In addition, their stronger bargaining position prompts them to seek a 2% real wage rise, leading to a total nominal wage increase of 5%. To preserve their profit margins, firms pass this 5% cost increase on to consumers by raising prices by 5%. This results in an actual inflation rate of 5% at 4% unemployment, plotting a new point on the Phillips curve for the given level of expected inflation.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
Related
Real Wage Index Assumption for Phillips Curve Derivation
Impact of Increased Aggregate Demand on Unemployment in a Business Cycle Upswing
Figure 4.9: Graphical Derivation of the Phillips Curve from the Bargaining Gap
Equivalence of Shape Between the Phillips Curve and the WS Curve
Figure 4.10: Deriving the Phillips Curve from the Causal Chain of Aggregate Demand, Unemployment, and Inflation
Consider a graphical model of the labor market where an upward-sloping 'wage-setting' relationship determines the real wage required to motivate workers at different levels of employment, and a horizontal 'price-setting' relationship determines the real wage firms can offer while maintaining their profit margins. If the economy is operating at a level of employment above the intersection point of these two relationships, what does this imply when plotting the corresponding point on a graph with inflation on the vertical axis and employment on the horizontal axis?
A macroeconomic model explains the relationship between unemployment and inflation using two underlying relationships in the labor market: an upward-sloping 'wage-setting' relationship and a horizontal 'price-setting' relationship. Arrange the following steps to correctly describe the causal chain that traces a point on the inflation-unemployment curve when the economy moves to a level of employment above the equilibrium where the two labor market relationships intersect.
Calculating Inflation from the Labor Market
In a standard graphical derivation from a labor market model, where an upward-sloping wage-setting relationship and a horizontal price-setting relationship are used to plot an inflation-employment curve, the resulting inflation-employment curve will have the same shape as the wage-setting relationship.
Impact of Structural Changes on the Inflation-Employment Relationship
A macroeconomic model derives an inflation-employment curve from a labor market model containing a wage-setting and a price-setting relationship. Match each concept from the labor market model to its direct consequence on the derived inflation-employment curve.
Deriving the Inflation-Employment Relationship
Consider a graphical model used to derive the relationship between inflation and employment. The model's starting point is a labor market graph with an upward-sloping 'wage-setting' relationship and a horizontal 'price-setting' relationship. The 'price-setting' relationship corresponds to a real wage index of 100. At an employment level of 97%, the 'wage-setting' relationship indicates a required real wage index of 103. Based on this information, what point is plotted on the corresponding inflation-employment graph?
Consider a labor market model represented on a graph with the real wage on the vertical axis and the level of employment on the horizontal axis. In this model, an upward-sloping 'wage-setting' (WS) curve intersects a horizontal 'price-setting' (PS) curve at an equilibrium point 'A'. At a higher level of employment, a point 'B' lies on the WS curve, vertically above the PS curve. Based on the graphical derivation method where the vertical gap between the WS and PS curves determines the inflation rate, which of the following accurately describes the corresponding inflation-employment curve?
In a graphical model where an inflation-employment curve is derived from a labor market model, if the level of employment is such that the real wage on the upward-sloping 'wage-setting' relationship is lower than the real wage on the horizontal 'price-setting' relationship, the resulting vertical gap corresponds to a rate of ______ on the inflation-employment curve.
Real Wage Formula
Starting Point for Phillips Curve Derivation
Phillips Curve's Shape as a Reflection of the Wage-Setting Curve
Deriving the Phillips Curve from the WS-PS Model with Positive Expected Inflation
Learn After
Figure: Labor Market Equilibrium and the Phillips Curve with Positive Expected Inflation
Causal Chain of Inflation with Positive Expected Inflation
Figure 4.12: Causal Chain of Inflation with Positive Expected Inflation
Inflation Formula with Adaptive Expectations
Dual Drivers of Persistent Inflation: Bargaining Gap and Expected Inflation
Inflation Dynamics in an Expanding Economy
In an economy, the structural rate of unemployment is 6%, and the expected rate of inflation is 2%. Due to a sudden economic boom, unemployment falls to 4%. This strengthens workers' bargaining position, leading them to successfully negotiate for a real wage increase of 1.5%. Assuming firms pass on the full increase in wage costs to consumers to maintain their profit margins, what will be the new actual rate of inflation?
An economy is initially at its supply-side equilibrium with positive expected inflation. A sudden increase in aggregate demand pushes unemployment below its structural rate. Arrange the following events in the correct causal sequence that leads to a new, higher rate of actual inflation.
Deconstructing Inflationary Pressures