Dual Challenge of Higher Inflation and Unemployment from a Persistent Supply Shock
A persistent negative supply shock, one that does not quickly reverse, shifts the economy to a new, less favorable supply-side equilibrium. This new state presents a dual challenge: a higher inflation-stabilizing unemployment rate () and an immediate increase in inflation caused by the shock at the initial level of employment. The economy is thus confronted with both rising prices and the need for higher unemployment to stabilize them.
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
Related
The Accelerating Wage-Price Spiral
Profit-Push Inflation (Sellers' Inflation)
Immediate Stagflationary Outcome of a Negative Supply Shock
Dual Challenge of Higher Inflation and Unemployment from a Persistent Supply Shock
Consider an economy where, following a sudden and significant increase in the price of an essential imported production input, policymakers initially do not intervene and the overall level of employment remains unchanged. Which statement best analyzes the immediate impact of this event on the economy?
An economy that heavily relies on imported oil experiences a sudden and sustained increase in global oil prices. Assuming the overall level of employment in the economy does not change in the short term, arrange the following events in the correct logical order to show how this shock leads to higher inflation.
Analyzing an Inflationary Shock
The Role of the Bargaining Gap in Inflation
In an economy where the level of employment is held constant, a sudden and significant increase in the price of a key imported raw material will cause the Phillips curve to shift downward, indicating lower inflation at the current employment level.
Following a sudden, sharp increase in the price of a key imported production input, an economy experiences inflationary pressure. Match each component of this economic process with its correct description.
Explaining the Inflationary Impact of a Supply-Side Shock
The term 'cost-push inflation' is used to describe the price increases following a negative supply shock (e.g., a rise in oil prices) because the shock directly impacts firms' production costs. In the standard macroeconomic model that explains this phenomenon, the initial impact is represented by a downward shift of the ______.
An economy experiences a significant increase in its overall inflation rate. An economist claims this is a classic case of cost-push inflation originating from a negative supply shock. Which of the following pieces of evidence would provide the strongest support for this specific claim, as opposed to other potential causes of inflation?
An economy experiences a sudden, sharp increase in its inflation rate. During this period, the national unemployment rate remains stable, and data shows that, on average, corporate profit margins have decreased. Two economists are debating the cause. Economist A argues it's due to excessive consumer spending. Economist B argues it's due to a recent global event that raised the price of essential imported industrial components. Based on the provided evidence, which economist's explanation is more plausible, and why?
Figure 5.7: Multi-Panel Diagram of a Negative Supply Shock's Immediate Impact
Origin of the Policy Dilemma from a Negative Supply Shock
Learn After
Analyzing a Persistent Economic Shock
An economy experiences a permanent and significant increase in the global price of energy, a critical input for almost all domestic firms. Assuming no immediate policy intervention, which statement best analyzes the dual challenge this economy will face in its new long-term equilibrium?
Following a permanent adverse supply-side event that reduces an economy's productive capacity, it is possible for policymakers to eventually guide the economy back to both its original inflation rate and its original unemployment rate.
The Policymaker's Dilemma from a Supply Shock
The Economic Consequences of a Lasting Supply Shock
An economy experiences a permanent negative supply shock, such as a lasting increase in energy costs. Arrange the following events to show the logical sequence of how the economy adjusts to a new, less favorable long-run equilibrium.
An economy experiences a persistent negative supply shock, such as a permanent increase in energy prices. Match each economic state or event with its correct description in the context of the adjustment to a new, less favorable equilibrium.
When an economy experiences a persistent negative supply shock, such as a permanent rise in energy costs, the long-run equilibrium is altered. To prevent inflation from continuously accelerating in this new equilibrium, the economy must sustain a higher rate of ______.
Evaluating Policy Responses to a Permanent Supply Shock
An economy experiences a permanent adverse supply-side event, such as the widespread adoption of a new technology that, while beneficial in the very long run, initially requires costly retooling and retraining, thus raising production costs across many sectors. What is the core dual challenge this creates for the economy's stabilization?