Policymaker's Role in Post-Supply Shock Disinflation
A complete model of disinflation following a supply-side event, like an oil shock, must include the role of the policymaker. The theoretical mechanisms for reducing inflation, such as creating a negative bargaining gap, are often implemented through deliberate policy actions, making the policymaker a necessary agent in the economic adjustment process.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Policymaker's Role in Post-Supply Shock Disinflation
Policy Response to a Sustained Price Shock
An economy experiences a permanent and significant increase in the world price of a key imported raw material. This event has shifted the level of unemployment consistent with stable inflation to a higher rate. In the aftermath, inflation is running well above the central bank's target. To successfully reduce inflation back towards the target, which of the following conditions must be achieved, at least temporarily?
An economy experiences a lasting adverse event that increases the cost of production for all firms. This leads to an initial surge in inflation and establishes a new, higher rate of unemployment that would be sustainable in the long run. Arrange the following stages into the logical sequence that describes how the economy can be guided back to a stable, low rate of inflation.
The Mechanism of Disinflation After a Supply Shock
An economy experiences a persistent adverse supply-side event that raises the long-run unemployment rate required to keep inflation stable. Match each phase of the economic adjustment process with its corresponding description of unemployment and inflation dynamics.
The Rationale for Higher Unemployment in Disinflation
Following a persistent adverse supply shock that has permanently increased an economy's structural unemployment rate, inflation can be brought back to its target level simply by allowing the actual unemployment rate to rise and settle at this new, higher structural level.
Following a persistent adverse supply-side event, an economy's structural unemployment rate has increased. To actively reduce the resulting high inflation, policymakers must implement measures that temporarily push the actual unemployment rate above this new structural rate, thereby creating a ______.
Critique of a Disinflation Strategy
Evaluating a Disinflationary Policy Proposal
The Role of High Unemployment in Reducing Inflation After the 1970s Oil Shocks
Learn After
An economy experiences a sudden, persistent negative supply-side event that raises production costs for all firms. This causes inflation to rise and establishes a new, higher rate of unemployment at which inflation would be stable. Given this new economic reality, which of the following policy responses is most likely to succeed in bringing inflation back down to the central bank's original target?
Policy Response to a Supply Shock
The Necessity of Policy Intervention After a Supply Shock
Following a permanent adverse supply-side event that increases the equilibrium unemployment rate, an economy will automatically return to its initial inflation target as long as policymakers do not interfere with the adjustment process.
The Role of Policy in Economic Adjustment
An economy is hit by a permanent adverse event that raises the cost of production for all firms. Arrange the following events to show the typical sequence of how policymakers would guide the economy back to a low and stable rate of price increases.
Following a persistent adverse supply-side event that has pushed up inflation, policymakers must take deliberate actions to guide the economy back to its inflation target. Match each policy action with its primary intended effect in this disinflationary process.
An economy experiences a permanent adverse supply-side event, leading to a higher stable-inflation rate of unemployment and a surge in price increases. A policymaker argues against intervention, believing the economy will naturally return to the original low inflation target on its own. Which of the following outcomes is the most likely consequence of this policy of inaction?
An economy experiences a permanent adverse supply-side event that raises both inflation and the unemployment rate at which inflation is stable. A policymaker proposes, 'To combat this inflation, our primary goal should be to use economic stimulus to quickly reduce unemployment back to its original, pre-event level.' Which of the following best evaluates the likely outcome of this proposed policy?
Following a persistent adverse supply-side event, a central bank deliberately tightens its policy stance, causing unemployment to rise temporarily above the new, higher rate at which inflation would be stable. This policy-induced economic slowdown is designed to create a __________ in the labor market, which is the necessary mechanism to put downward pressure on wage and price inflation.