Reducing Inflation After a Supply Shock via a Negative Bargaining Gap

The Role of High Unemployment in Reducing Inflation After the 1970s Oil Shocks

Stabilizing an Economy After a Supply Shock

An economy experiences a permanent adverse supply-side event, such as a new tax on production, which raises firms' costs and triggers a wage-price spiral. To eventually restore a stable rate of inflation without further policy intervention, what adjustment must occur within the labor market?

Following a permanent adverse supply-side shock that lowers the price-setting curve, arrange the following events in the chronological order they must occur for the economy to return to a stable inflation equilibrium.

Following a permanent negative supply-side shock, such as a lasting increase in energy costs, the economy can return to its original rate of unemployment and still achieve stable inflation.

The Labor Market's Role in Post-Shock Inflation Stabilization