Role of Expectations in Determining Inflation Persistence After a Cost-Push Shock
The way in which inflation expectations are formed is crucial in determining the long-term consequences of a cost-push shock. If expectations remain anchored or adjust slowly, the shock may only cause a one-time increase in the inflation rate. However, if expectations are adaptive and people revise them upwards in response to the initial price rise, a self-perpetuating wage-price spiral can be triggered, leading to sustained and accelerating inflation.
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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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Friedman's Argument: How Adaptive Expectations Fuel Accelerating Inflation
Disinflationary Process from a Sustained Recessionary Shock
Symmetrical Inflationary Dynamics in Booms and Recessions
The Accelerating Wage-Price Spiral
Role of Expectations in Determining Inflation Persistence After a Cost-Push Shock
The Necessity of a Costly Recession to Counter Unanchored Expectations After a Supply Shock
Closed Economy Assumption in the Unit 4 Inflation Model
An economy is in a stable equilibrium with an unemployment rate of 5% and an inflation rate of 2%. Workers and firms have consistently expected inflation to be 2%. A central bank policy announcement then causes the public to credibly revise their inflation expectations for the next year to 4%. Assuming the unemployment rate remains at 5%, what is the most likely immediate outcome for the actual inflation rate, and why?
The Impact of Shifting Inflation Expectations
Analyzing an Expectations Shock
Arrange the following events to illustrate the causal chain through which an increase in inflation expectations leads to a higher actual rate of inflation for any given level of unemployment.
Learn After
Inflation Dynamics Following a Supply Shock
Imagine an economy experiences a sudden, significant increase in the price of imported raw materials. If the public generally believes that the central bank will successfully maintain its long-term inflation target, what is the most probable consequence for inflation over the medium term?
Following a significant, unexpected increase in energy prices, an economy begins to experience a self-perpetuating wage-price spiral because inflation expectations have become unanchored. Arrange the following events in the logical sequence that describes this process.
Inflation Persistence and Expectations
Contrasting Inflationary Outcomes from a Supply Shock
An economy experiences a sudden, large increase in the cost of production due to external factors. Which of the following subsequent developments would be the strongest indicator that this initial price shock is likely to evolve into a period of sustained, high inflation?
An economy experiences a significant, unexpected increase in production costs. Match each type of public expectation about future inflation to its most likely outcome.
In an economy where the public has strong confidence in the central bank's commitment to price stability, a sudden and significant increase in global energy prices is more likely to cause a temporary spike in the price level than a long-lasting acceleration of the inflation rate.
Comparative Inflationary Responses to a Supply Shock
Central Bank Credibility and Inflation Persistence