The Accelerating Wage-Price Spiral

Demand-Pull Inflation

Inflation Dynamics in a High-Pressure Economy

An economy's unemployment rate is held persistently below its equilibrium level. Arrange the following events in the correct chronological order to illustrate the mechanism that would cause the rate of inflation to accelerate over time.

An economy's unemployment rate is held persistently below its equilibrium level. In Year 1, this leads to a positive 'bargaining gap' where workers have stronger negotiating power. Initially, inflation was 2%, but by the end of Year 1, it has risen to 4%. If workers and firms base their expectations for the next year's inflation on the most recent year's actual inflation rate, what is the most likely outcome for the inflation rate in Year 2 and beyond, assuming the low unemployment continues?

The Dynamics of Accelerating Inflation

The Role of Expectations in Accelerating Inflation

In an economy where the unemployment rate is held persistently below its equilibrium level, the inflation rate will increase to a new, higher, but stable level as long as the unemployment rate remains unchanged.

Match each economic component with its specific role in the process where persistently low unemployment leads to accelerating inflation.

In an economy with persistently low unemployment, a positive bargaining gap leads to an initial increase in wages and prices. For this inflation to continuously accelerate rather than stabilize at a new higher rate, the initial price increase must lead to a rise in ____ ____, which then gets factored into the next round of wage negotiations.

An economy's unemployment rate is held persistently below its equilibrium level. This leads to an initial rise in inflation. Which of the following provides the most accurate explanation for why this situation would lead to a continuously accelerating rate of inflation, rather than a new, stable, higher rate of inflation?

Evaluating a Policy Response to Rising Inflation