Role of Inflation Expectations in Determining Inflation Persistence

Analyzing an Inflationary Shock

An economy is in a medium-run equilibrium with stable inflation. A large, unexpected increase in investment spending occurs, boosting aggregate demand. According to a comprehensive framework that links aggregate demand, supply-side conflicts over wages and prices, and inflation expectations, what is the most direct mechanism that initiates a rise in inflation?

An economy is initially at its medium-run equilibrium with stable prices. A government spending program then causes a positive shock to aggregate demand. According to the integrated framework that combines aggregate demand, the wage-setting/price-setting model, and inflation expectations, arrange the following events in the correct chronological order to trace the initial impact on the inflation rate.

Diagnosing the Source of Inflation