Supply Shock and the Emergence of a Bargaining Gap
When a negative supply shock, such as the downward shift of the PS curve from protectionist policies, occurs while employment is held constant by fixed aggregate demand, a positive bargaining gap emerges. This happens because at the pre-existing employment level, the wage on the wage-setting curve is now above the new, lower price-setting curve. This event also signifies a shift in the supply-side equilibrium (SSE) to a lower level of employment, even though the economy has not yet adjusted to it.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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Supply Shock and the Emergence of a Bargaining Gap
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Figure 4.20b: Negative Supply Shock (Higher Markup) with Unchanged Aggregate Demand
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Figure 4.24: Illustration of a Cost-Push Inflationary Spiral from an Oil Shock
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Figure 4.20a: A Negative Supply Shock Opening a Bargaining Gap