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Upward Shift of the Phillips Curve due to a Negative Supply Shock
A negative supply-side shock, such as a decrease in competition that allows firms to increase their markup, causes the entire Phillips curve to shift vertically upward. This occurs because, at any given level of employment, firms' pricing decisions add a larger profit margin on top of their costs, leading to a higher overall inflation rate. For instance, a 2% increase in the markup would shift the Phillips curve upward by 2 percentage points. This shift is distinct from changes caused by inflation expectations, as it can occur while expectations remain constant.
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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
CORE Econ
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Figure 4.25: Price Responses to Rising Employment and Capacity Utilization
An economy experiences a period where the costs of labor and raw materials remain stable. However, after a wave of mergers reduces the number of companies in several key industries, the remaining firms begin to increase their prices significantly more than their production costs. Which of the following best identifies and explains the resulting inflationary pressure?
Analyzing Inflation Drivers in an Economy
Explaining an Alternative Inflationary Mechanism
Arrange the following events in the correct chronological order to illustrate the process by which a reduction in market competition can lead to a sustained increase in the general price level.
In a scenario of profit-push inflation, where firms increase their price markups due to a decrease in market competition, the price-setting (PS) curve shifts upward, creating a positive bargaining gap that drives inflation.
Match each component of the profit-push inflation model with its corresponding role or outcome in the economic process.
Evaluating Claims About Inflation Drivers
When firms with increased market power decide to raise their profit margins, the price-setting curve shifts ______, which creates a bargaining gap and initiates an inflationary spiral at the existing level of employment.
Disaggregating Inflationary Pressures
Consider an economy where several key industries become more concentrated, leading to reduced competition. Firms in these industries subsequently raise their prices, even though their costs for labor and materials have not changed. Within the standard wage-setting and price-setting framework, what is the direct mechanism that initiates the resulting inflation?
Upward Shift of the Phillips Curve due to a Negative Supply Shock
Distributional Conflict from Unexpected Inflation
Figure 4.20c: The Mechanism of Profit-Push Inflation
Effect of Low Unemployment on Worker Bargaining Power and the WS Curve
Figure 4.26: Profit-Push Inflation Due to Capacity Constraints
Academic and Central Bank Research on Post-Pandemic Corporate Markups (2022-2023)
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Real Wage Erosion from Unanticipated Profit-Push Inflation
An economy experiences a wave of industrial consolidation, leading to a significant decrease in market competition. Consequently, firms across major sectors increase their average profit markup over production costs. If workers' and firms' expectations about future price increases remain stable, what is the most likely immediate impact on the relationship between the inflation rate and the employment rate?
Impact of Deregulation on Inflation and Employment
Impact of Trade Policy on the Inflation-Employment Relationship
In an economy where inflation expectations are firmly anchored, a widespread increase in firms' market power that allows them to raise their profit margins will cause a movement up along the existing Phillips curve, leading to higher inflation at a lower level of unemployment.