Origin of the Policy Dilemma from a Negative Supply Shock
The policy dilemma following a negative supply shock originates from the economy's lack of an automatic adjustment mechanism. If output and employment are maintained at their initial levels after the shock, the economy does not immediately move to its new, lower-employment equilibrium (point C). Instead, it remains at the pre-shock employment level (moving to point B on the new price-setting curve), which opens a positive bargaining gap. This gap is inherently inflationary, causing the Phillips curve to shift upward and increasing the inflation rate, for instance, from a target of 2% to 4%.
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Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
Related
The Accelerating Wage-Price Spiral
Profit-Push Inflation (Sellers' Inflation)
Immediate Stagflationary Outcome of a Negative Supply Shock
Dual Challenge of Higher Inflation and Unemployment from a Persistent Supply Shock
Consider an economy where, following a sudden and significant increase in the price of an essential imported production input, policymakers initially do not intervene and the overall level of employment remains unchanged. Which statement best analyzes the immediate impact of this event on the economy?
An economy that heavily relies on imported oil experiences a sudden and sustained increase in global oil prices. Assuming the overall level of employment in the economy does not change in the short term, arrange the following events in the correct logical order to show how this shock leads to higher inflation.
Analyzing an Inflationary Shock
The Role of the Bargaining Gap in Inflation
In an economy where the level of employment is held constant, a sudden and significant increase in the price of a key imported raw material will cause the Phillips curve to shift downward, indicating lower inflation at the current employment level.
Following a sudden, sharp increase in the price of a key imported production input, an economy experiences inflationary pressure. Match each component of this economic process with its correct description.
Explaining the Inflationary Impact of a Supply-Side Shock
The term 'cost-push inflation' is used to describe the price increases following a negative supply shock (e.g., a rise in oil prices) because the shock directly impacts firms' production costs. In the standard macroeconomic model that explains this phenomenon, the initial impact is represented by a downward shift of the ______.
An economy experiences a significant increase in its overall inflation rate. An economist claims this is a classic case of cost-push inflation originating from a negative supply shock. Which of the following pieces of evidence would provide the strongest support for this specific claim, as opposed to other potential causes of inflation?
An economy experiences a sudden, sharp increase in its inflation rate. During this period, the national unemployment rate remains stable, and data shows that, on average, corporate profit margins have decreased. Two economists are debating the cause. Economist A argues it's due to excessive consumer spending. Economist B argues it's due to a recent global event that raised the price of essential imported industrial components. Based on the provided evidence, which economist's explanation is more plausible, and why?
Figure 5.7: Multi-Panel Diagram of a Negative Supply Shock's Immediate Impact
Origin of the Policy Dilemma from a Negative Supply Shock
Learn After
The Inflation-Unemployment Trade-off and the Role of Supply-Side Policy
An economy is operating at its long-run equilibrium when it is hit by a sudden, large increase in the price of a key imported raw material. In the immediate aftermath of this event, before any policy response, why does a difficult choice emerge for economic policymakers?
Analyzing the Immediate Impact of a Supply Shock
The Policy Dilemma from a Supply Shock
An economy is initially in a stable state. It then experiences a sudden, large increase in the price of a critical imported resource. Arrange the following statements to describe the logical sequence of events that leads to a difficult choice for economic policymakers.
Following a sudden and significant increase in the price of a key imported resource, the economy's immediate and automatic response is a simultaneous rise in inflation and a fall in employment, which presents policymakers with a difficult choice.
An economy, initially in a stable equilibrium, experiences a sudden and significant increase in the price of a key imported resource. Match each economic event with its immediate consequence in this scenario, before any policy response or labor market adjustment.
The Economic Conundrum of a Sudden Cost Increase
In the immediate aftermath of a negative supply shock, if the level of employment in the economy does not change, the discrepancy that opens up between the real wage firms are willing to offer to secure workers and the real wage that provides workers with the incentive to work creates a positive ____ ____, which is the direct source of the initial inflationary pressure.
Evaluating an Economic Advisor's Analysis of a Supply Shock
An economy is operating at a stable equilibrium when it is hit by a sudden, negative supply shock (e.g., a sharp increase in global energy prices). In the immediate aftermath of this shock, before the labor market has had time to adjust and before any governmental policy response, which of the following best describes the state of the economy?
Supply Shocks vs. Demand Shocks: A Policy Dilemma Contrast
The Central Bank's Inflation-Unemployment Trade-off After a Supply Shock
Risks in the Central Bank's Balancing Act After a Supply Shock