The Wage-Price Spiral Following a Supply Shock
A negative supply shock can initiate a wage-price spiral. After an initial round of profit-push inflation erodes real wages, workers revise their inflation expectations upward. In the next wage-setting period, they demand higher nominal wages to compensate for both the new expected inflation and to recover lost purchasing power. This response causes the Phillips curve to shift up again, perpetuating inflation.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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The Wage-Price Spiral Following a Supply Shock
At the start of the year, a company and its employees agree to a 2% nominal wage increase, with both sides expecting the overall price level in the economy to rise by 2%. Mid-year, the company, along with many others in the industry, raises its prices by 4% to increase its profit margins. Assuming the employees' nominal wages are fixed for the year, what is the direct consequence for the employees' purchasing power by the end of the year?
Labor Market Dynamics at Innovate Inc.
An economy begins in a state where wage contracts have been set based on a mutually agreed-upon expectation for the rate of price increases over the next year. Partway through the year, a majority of firms independently decide to raise their prices by a larger amount than was expected in order to increase their profit margins. Arrange the following events in the correct logical and chronological order that results from the firms' actions.
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Analyzing an Inflationary Cycle
An economy experiences a sudden, widespread increase in the cost of energy, a key input for most businesses. Arrange the following events in the most likely causal sequence that would follow, leading to a sustained inflationary period.
An economy experiences a sudden, sharp increase in the cost of raw materials, leading to an initial, unexpected rise in the general price level. Which of the following scenarios best explains how this single event could evolve into a self-perpetuating inflationary cycle?
Explaining the Wage-Price Spiral Mechanism