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Example of the Wage-Price Spiral: Shifting Phillips Curve
A concrete example of the wage-price spiral can be illustrated with a shifting Phillips curve. An economy begins in a stable state (Point A) with 6% unemployment and 3% inflation. Following a boom that reduces unemployment to 4%, the economy moves along the existing Phillips curve to a new point (Point B), where inflation increases to 5%. For the next period, workers and firms adjust their inflation expectations to 5%. This upward revision of expectations causes the entire Phillips curve to shift upwards. Consequently, even with unemployment held at 4%, inflation will rise again, moving the economy to a new point (Point C) on the higher Phillips curve. This sequence demonstrates how low unemployment can trigger a self-perpetuating, year-over-year increase in inflation.
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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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Figure 4.13: A Comparison of Inflation Over Three Years at Different Unemployment Levels
Example of the Wage-Price Spiral: Shifting Phillips Curve
Figure 4.16: The Path of Inflation Over Time with a Persistent Bargaining Gap
Real Wage Reduction and Conflicting Interests from Unexpected Inflation
Figure 4.24: Illustration of a Cost-Push Inflationary Spiral from an Oil Shock
Inflation as the Sum of Bargaining Gap and Expected Inflation
Analyzing an Inflationary Scenario
An economy is experiencing a sustained period where employment is held at a level higher than its long-run equilibrium. In the most recent year, the inflation rate was 4%. Assuming this high level of employment continues into the next year, what is the most probable outcome for the inflation rate and why?
An economy experiences a sustained boom, keeping employment consistently above its long-run stable level. This situation triggers a cycle of accelerating price increases. Arrange the following events into the correct chronological sequence that describes this self-perpetuating process.
According to the wage-price spiral model, if an economy maintains a constant, positive bargaining gap (for instance, by keeping employment consistently above its equilibrium level), the inflation rate will eventually settle at a new, stable, higher level.
Calculating Inflation in a Wage-Price Spiral
Evaluating a Policy Response to a Wage-Price Spiral
Match each component of the wage-price spiral with its specific role in the process of accelerating inflation.
An economy is experiencing a wage-price spiral where employment is consistently held above its equilibrium level, creating a persistent positive bargaining gap. Which of the following best explains why the inflation rate accelerates over time in this situation, rather than simply settling at a new, higher, stable level?
In the economic model of an accelerating wage-price spiral, the continuous upward shift of the ________ curve is the primary graphical representation of the cycle, driven by a persistent positive bargaining gap and rising inflation expectations.
Evaluating a Central Banker's Policy Stance
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Predicting Inflationary Pressures
An economy experiences a boom that pushes unemployment below its long-run stable rate. Arrange the following events to show the resulting process that leads to accelerating inflation.
An economy is in a stable state with 6% unemployment and 3% inflation. A government stimulus program causes a boom, reducing unemployment to 4% and causing inflation to rise to 5% in the first year. Assuming workers and firms now adjust their inflation expectations to 5% for the following year, what is the most likely outcome in the second year if unemployment remains at 4%?
The Mechanism of Accelerating Inflation
The Dynamics of the Shifting Phillips Curve
A sustained period of low unemployment will cause an economy to move to progressively higher inflation points along a single, stable short-run Phillips curve.
An economy, initially in a stable state, experiences a boom that reduces unemployment. This event triggers a multi-period process of rising inflation. Match each stage of this process (Point A, Point B, Point C) with its corresponding economic description.
In the context of the wage-price spiral, after an initial period where low unemployment leads to higher inflation, the primary factor that causes the entire short-run Phillips curve to shift upwards in the following period is the upward adjustment of ____.
Evaluating a Policy Trade-off
An economy is initially stable with 3% inflation and 6% unemployment. A boom reduces unemployment to 4%, causing inflation to rise to 5%. In response, workers and firms adjust their inflation expectations to 5% for the next period, causing the entire short-run relationship between unemployment and inflation to shift upwards. Given this new, higher relationship, what would be necessary to bring the inflation rate back down to its original 3%?
Worker Dissatisfaction due to Unanticipated Inflation in a Boom