Figure 4.13: A Comparison of Inflation Over Three Years at Different Unemployment Levels

Example of the Wage-Price Spiral: Shifting Phillips Curve

Figure 4.16: The Path of Inflation Over Time with a Persistent Bargaining Gap

Real Wage Reduction and Conflicting Interests from Unexpected Inflation

Figure 4.24: Illustration of a Cost-Push Inflationary Spiral from an Oil Shock

Inflation as the Sum of Bargaining Gap and Expected Inflation

Analyzing an Inflationary Scenario

An economy is experiencing a sustained period where employment is held at a level higher than its long-run equilibrium. In the most recent year, the inflation rate was 4%. Assuming this high level of employment continues into the next year, what is the most probable outcome for the inflation rate and why?

An economy experiences a sustained boom, keeping employment consistently above its long-run stable level. This situation triggers a cycle of accelerating price increases. Arrange the following events into the correct chronological sequence that describes this self-perpetuating process.

According to the wage-price spiral model, if an economy maintains a constant, positive bargaining gap (for instance, by keeping employment consistently above its equilibrium level), the inflation rate will eventually settle at a new, stable, higher level.

Calculating Inflation in a Wage-Price Spiral

Evaluating a Policy Response to a Wage-Price Spiral

Match each component of the wage-price spiral with its specific role in the process of accelerating inflation.

An economy is experiencing a wage-price spiral where employment is consistently held above its equilibrium level, creating a persistent positive bargaining gap. Which of the following best explains why the inflation rate accelerates over time in this situation, rather than simply settling at a new, higher, stable level?

In the economic model of an accelerating wage-price spiral, the continuous upward shift of the ________ curve is the primary graphical representation of the cycle, driven by a persistent positive bargaining gap and rising inflation expectations.

Evaluating a Central Banker's Policy Stance

Real Wage Reduction and Conflicting Interests from Unexpected Inflation

An economy is operating at its long-run equilibrium with a stable inflation rate of 3% and an unemployment rate of 5%. Suddenly, a severe drought drastically reduces agricultural output, causing a sharp, economy-wide increase in the price of food and other raw materials. In the immediate aftermath of this event, and before any policy response, what is the most likely state of the economy?

Analyzing an Energy Price Shock

The Stagflationary Dilemma from a Supply Shock

True or False: Following a negative supply shock, the immediate stagflationary outcome occurs because the economy's equilibrium unemployment rate remains unchanged, but actual unemployment falls, triggering higher inflation.