Immediate Effects of an Oil Price Shock: PS Curve Shift and Output Share Redistribution
Following an increase in the price of an imported input like oil, a redistribution of output shares occurs. Foreign oil producers claim a larger portion of the output per worker. To maintain their own profit margins, domestic firms pass on this cost increase by raising prices. This action reduces the real wage for workers, who end up with a smaller share of the output. This reduction in the real wage is represented by a downward shift in the price-setting (PS) curve, which opens a positive bargaining gap at the initial employment level.
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Introduction to Macroeconomics Course
Ch.2 Unemployment, wages, and inequality: Supply-side policies and institutions - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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Immediate Effects of an Oil Price Shock: PS Curve Shift and Output Share Redistribution
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An economy is heavily dependent on an imported raw material. If the global price of this material rises sharply, and domestic firms respond by raising their product prices to protect their profit margins, what is the most likely immediate effect on the real wage and the price-setting (PS) curve?
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