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