Figure 4.26: Profit-Push Inflation Due to Capacity Constraints
This figure illustrates the consequences of firms increasing their price markup as capacity utilization rises with output and employment. This dynamic results in a price-setting (PS) curve that slopes downward. The diagram demonstrates that this situation widens the bargaining gap through two mechanisms: first, the increased tightness of the labor market (affecting the wage-setting curve), and second, the capacity constraints that empower firms to raise markups (affecting the price-setting curve). The combined effect of the upward-sloping wage-setting (WS) curve and the downward-sloping PS curve leads to a steeper Phillips curve.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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Effect of a Downward-Sloping PS Curve on the Phillips Curve's Slope
In a macroeconomic model where firms' price markups can change, which statement best analyzes the reason for a downward-sloping price-setting (PS) curve?
The Link Between Employment and Firm Pricing
Pricing Strategy During an Economic Boom
In an economic model where firms' price markups can change, a downward-sloping price-setting (PS) curve indicates that as the economy-wide level of employment rises, competitive pressures on firms intensify, forcing them to reduce their markups.
The Relationship Between Economic Activity and Firm Pricing Power
Match the level of economy-wide employment with its resulting impact on market competition and firms' pricing decisions.
In an economic model where firms' price markups over costs tend to rise as economy-wide employment and output approach full capacity, what is the resulting relationship between the level of employment and the real wage set by firms?
When economy-wide employment is high and many firms are operating near their production limits, the resulting decrease in competition allows them to increase their ____ over costs.
An economy experiences a significant rise in aggregate demand, leading to higher employment. Arrange the following events in the correct logical sequence to illustrate the resulting impact on firms' pricing and the real wage.
An economist argues that the price-setting (PS) curve, which represents the real wage resulting from firms' pricing decisions, should be a horizontal line because firms generally apply a consistent percentage markup over their costs. Which of the following statements presents the most robust counter-argument, explaining why the PS curve is often modeled as downward-sloping?
Figure 4.26: Profit-Push Inflation Due to Capacity Constraints
Figure 4.25: Price Responses to Rising Employment and Capacity Utilization
An economy experiences a period where the costs of labor and raw materials remain stable. However, after a wave of mergers reduces the number of companies in several key industries, the remaining firms begin to increase their prices significantly more than their production costs. Which of the following best identifies and explains the resulting inflationary pressure?
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Arrange the following events in the correct chronological order to illustrate the process by which a reduction in market competition can lead to a sustained increase in the general price level.
In a scenario of profit-push inflation, where firms increase their price markups due to a decrease in market competition, the price-setting (PS) curve shifts upward, creating a positive bargaining gap that drives inflation.
Match each component of the profit-push inflation model with its corresponding role or outcome in the economic process.
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When firms with increased market power decide to raise their profit margins, the price-setting curve shifts ______, which creates a bargaining gap and initiates an inflationary spiral at the existing level of employment.
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Consider an economy where several key industries become more concentrated, leading to reduced competition. Firms in these industries subsequently raise their prices, even though their costs for labor and materials have not changed. Within the standard wage-setting and price-setting framework, what is the direct mechanism that initiates the resulting inflation?
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Distributional Conflict from Unexpected Inflation
Figure 4.20c: The Mechanism of Profit-Push Inflation
Effect of Low Unemployment on Worker Bargaining Power and the WS Curve
Figure 4.26: Profit-Push Inflation Due to Capacity Constraints
Academic and Central Bank Research on Post-Pandemic Corporate Markups (2022-2023)
In an economic model where firms' price markups over cost are not constant but increase as production approaches full capacity, what is the combined effect of a significant rise in employment on the bargaining gap?
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In an economic model where firms' price markups increase as they approach full capacity, the bargaining gap widens with rising employment only because workers gain more leverage to negotiate for higher wages.
As employment rises in an economy where firms' price markups increase as they near full capacity, the bargaining gap widens. Match each underlying cause to its corresponding effect on the labor market model's curves.
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In a model where firms' price markups increase as they approach full capacity, the bargaining gap widens with rising employment due to both increased worker leverage and the firms' ability to increase their ______, which pushes down the real wage they offer.
In an economic model where firms' price markups rise as they approach full capacity, an increase in employment triggers a chain of events on the firms' side that contributes to a wider bargaining gap. Arrange the following steps to reflect this causal sequence.
Consider an economic model where firms' ability to set prices above their costs increases as production levels approach the economy's maximum capacity. If this economy experiences a substantial rise in employment, which statement best analyzes the dual impact on the bargaining gap (the difference between the real wage sought by workers and the real wage offered by firms)?
Figure 4.26: Profit-Push Inflation Due to Capacity Constraints
Consider two economies that are identical except for how firms set prices. In Economy A, firms maintain a constant price markup over their costs, regardless of how busy the economy is. In Economy B, firms find they can increase their price markups when demand is high and employment is strong. How would the short-run relationship between a change in unemployment and the resulting change in inflation likely differ between these two economies?
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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