Economic Consequences of Higher Imported Input Costs
An increase in the cost of imported inputs, such as oil, often leads to a deterioration in a country's terms of trade, reducing the nation's overall real income. This loss creates a conflict over who bears the burden, which can trigger inflation as firms and workers try to protect their incomes by raising prices and demanding higher wages, respectively. This struggle is captured in the WS-PS model as a positive bargaining gap and a downward shift of the price-setting (PS) curve, resulting in a new equilibrium with higher structural unemployment.
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Introduction to Macroeconomics Course
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