Predicting Inflationary Pressures

An economy experiences a boom that pushes unemployment below its long-run stable rate. Arrange the following events to show the resulting process that leads to accelerating inflation.

An economy is in a stable state with 6% unemployment and 3% inflation. A government stimulus program causes a boom, reducing unemployment to 4% and causing inflation to rise to 5% in the first year. Assuming workers and firms now adjust their inflation expectations to 5% for the following year, what is the most likely outcome in the second year if unemployment remains at 4%?

The Mechanism of Accelerating Inflation

The Dynamics of the Shifting Phillips Curve

A sustained period of low unemployment will cause an economy to move to progressively higher inflation points along a single, stable short-run Phillips curve.

An economy, initially in a stable state, experiences a boom that reduces unemployment. This event triggers a multi-period process of rising inflation. Match each stage of this process (Point A, Point B, Point C) with its corresponding economic description.

In the context of the wage-price spiral, after an initial period where low unemployment leads to higher inflation, the primary factor that causes the entire short-run Phillips curve to shift upwards in the following period is the upward adjustment of ____.

Evaluating a Policy Trade-off

An economy is initially stable with 3% inflation and 6% unemployment. A boom reduces unemployment to 4%, causing inflation to rise to 5%. In response, workers and firms adjust their inflation expectations to 5% for the next period, causing the entire short-run relationship between unemployment and inflation to shift upwards. Given this new, higher relationship, what would be necessary to bring the inflation rate back down to its original 3%?

Worker Dissatisfaction due to Unanticipated Inflation in a Boom