Dual Drivers of Persistent Inflation: Bargaining Gap and Expected Inflation
When unemployment remains below its inflation-stabilizing rate, a persistent bargaining gap is created. This gap initiates an inflationary process. However, the inflation continues to rise in subsequent periods due to the role of expected inflation. The inflation rate from the previous period shapes the expectations for the current period, which in turn influences wage and price setting. This dynamic creates a feedback loop where a sustained bargaining gap and adaptive inflation expectations work together to cause inflation to increase year after year.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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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
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Real Wage Stability on the PS Curve During an Inflationary Spiral
Analyzing an Inflationary Spiral
An economy experiences a sustained period where the unemployment rate is held consistently below the level that would normally keep inflation constant. If workers and firms form their expectations about future inflation based on the inflation rate of the previous period, what is the most likely outcome for the inflation rate over several consecutive periods?
An economy starts at its inflation-stabilizing unemployment rate. A government stimulus then causes unemployment to fall and remain below this rate for several periods. Arrange the following events to show the causal chain that leads to continuously rising inflation, assuming expectations are based on the previous period's inflation.
In an economy where unemployment is persistently below the inflation-stabilizing rate, the resulting positive bargaining gap is, by itself, sufficient to cause inflation to increase year after year.