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