Figure 4.16: The Path of Inflation Over Time with a Persistent Bargaining Gap

A country's government implements a series of fiscal policies that successfully maintain the national unemployment rate at 3% for several consecutive years. Economic analysis indicates that the rate of unemployment that keeps inflation constant is 5%. Given this sustained period of very low unemployment, what is the most likely long-term consequence for the economy?

Analyzing Sustained Economic Booms

Explaining Continuous Price Pressure in a Boom

In an economy experiencing a sustained boom with unemployment held below the inflation-stabilizing rate, the persistent positive bargaining gap implies that workers are successfully negotiating and receiving progressively higher real wages over time.

Match each sustained economic condition with its most likely effect on the relationship between workers and firms, and the resulting pressure on prices.

The Wage-Price Spiral in a High-Employment Economy

When an economy's unemployment rate is sustained below the level that stabilizes inflation, the resulting persistent positive bargaining gap creates continuous upward pressure on ____.

An economy is in a sustained boom, with unemployment held below the rate that would keep inflation stable. This creates a persistent positive bargaining gap. Arrange the following events into the correct repeating sequence that describes the resulting upward pressure on prices.

For several consecutive years, a country's unemployment rate has been held at 2%, well below the 5% rate that is estimated to keep inflation stable. As a result, inflation has been rising year after year. Which statement best analyzes the core mechanism driving this continuous increase in inflation?

Evaluating a Policy Response to a Persistent Bargaining Gap

Disappointment of Workers' Real Wage Expectations

Causal Chain of Inflation with Adaptive Expectations

Figure 4.16: The Path of Inflation Over Time with a Persistent Bargaining Gap

Predicting Accelerating Inflation

An economy starts with stable inflation and a zero bargaining gap. A new policy then causes unemployment to fall and remain low, creating a persistent positive bargaining gap. According to the theory where inflation expectations are based on the previous year's inflation, arrange the following events in the causal order that leads to accelerating inflation.

An economy has an initial stable inflation rate of 2%. A new government policy successfully keeps unemployment low, creating a persistent positive bargaining gap of 1% year after year. Economic agents in this economy form their inflation expectations based on the actual inflation rate of the previous year. Which statement best analyzes the long-term consequences of this policy?

An economy has a stable inflation rate of 2% in Year 0. Starting in Year 1, a new policy creates a persistent positive bargaining gap of 1.5%. If economic agents form their inflation expectations based on the actual inflation rate of the previous year, the inflation rate in Year 2 will be ____%.

Explaining Accelerating Inflation

The Role of Expectations in Inflation Dynamics

An economy is experiencing a cycle where inflation grows higher each year. This process is driven by a combination of a persistent factor giving workers bargaining power and the way people form their expectations about future price increases. Match each component of this inflationary process to its correct description.

According to the model where inflation expectations are based on the previous year's inflation, a government policy that creates a persistent positive bargaining gap will cause the inflation rate to rise and then stabilize at a new, higher level.

An economic advisor tells a policymaker, 'We can permanently lower the unemployment rate below its equilibrium level if we are willing to accept a stable, higher inflation rate of 5%.' Based on the economic theory where inflation expectations are determined by the actual inflation rate of the previous year, which of the following is the most accurate evaluation of this advice?

Diagnosing the Source of Accelerating Inflation

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