Effect of a Downward-Sloping PS Curve on the Phillips Curve's Slope
The slope of the Phillips curve is affected by the shapes of the wage-setting (WS) and price-setting (PS) curves. When the PS curve is downward-sloping (due to markups rising with employment), the combined effect of the upward-sloping WS curve and the downward-sloping PS curve results in a larger bargaining gap for any given increase in employment. This translates into a steeper Phillips curve, indicating a more sensitive trade-off between unemployment and inflation.
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Economics
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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
CORE Econ
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Effect of a Downward-Sloping PS Curve on the Phillips Curve's Slope
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Figure 4.26: Profit-Push Inflation Due to Capacity Constraints
Learn After
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In an economy where businesses can charge significantly higher price markups when the labor market is tight (low unemployment), a given decrease in the unemployment rate will lead to a relatively small and manageable increase in the inflation rate.
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Figure 4.26: Profit-Push Inflation Due to Capacity Constraints