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?

Analyzing Inflation Drivers in an Economy

Explaining an Alternative Inflationary Mechanism

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.

Evaluating Claims About Inflation Drivers

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.

Disaggregating Inflationary Pressures

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?

Upward Shift of the Phillips Curve due to a Negative Supply Shock

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)