Figure 4.20b: Negative Supply Shock (Higher Markup) with Unchanged Aggregate Demand

Cost-Push Inflation from a Negative Supply Shock (e.g., Oil Price Rise)

Figure 4.24: Illustration of a Cost-Push Inflationary Spiral from an Oil Shock

Analyzing an Economic Shock

Consider an economy in equilibrium where a sudden, negative supply shock occurs, such as a significant increase in the price of imported oil. If aggregate demand policies hold the level of employment constant in the immediate aftermath, what is the direct consequence for the wage-setting (WS) and price-setting (PS) curves and the resulting bargaining gap?

Analyzing the Emergence of a Bargaining Gap

Following a negative supply shock that causes the price-setting curve to shift downward, a positive bargaining gap emerges at the initial level of employment only if the wage-setting curve simultaneously shifts upward.

An economy is initially in a stable equilibrium. A new government policy is enacted that significantly reduces competition from foreign firms. Assuming aggregate demand remains unchanged, arrange the following events in the correct chronological order to show the immediate impact on the labor market.

An economy experiences a negative supply shock due to new government policies that reduce market competition. Assuming aggregate demand holds the employment level constant in the short run, match each economic concept to its correct description in this context.

Evaluating Policy Responses to a Supply Shock

Consider an economy initially at its supply-side equilibrium. A government enacts new protectionist policies, which reduces competition and allows domestic firms to increase their profit markups. In the immediate aftermath, monetary and fiscal policies hold the overall level of employment constant. Which statement provides the most accurate analysis of the labor market at this point?

Consider an economy where a negative supply shock causes the price-setting curve to shift downward. In this scenario, the new long-run equilibrium for the economy will involve a higher level of employment than before the shock.

When an economy-wide shock reduces the real wage that firms can profitably offer, but the level of employment remains unchanged, the resulting difference between the wage workers demand and the wage firms offer is known as a positive ____ ____.

Protectionist Policies as an Inflationary Supply Shock

Figure 4.20a: A Negative Supply Shock Opening a Bargaining Gap

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