Cost-Push Inflation from a Negative Supply Shock (e.g., Oil Price Rise)
A negative supply-side shock, such as an increase in the price of imported oil, is a source of cost-push inflation. The shock causes the price-setting (PS) curve to shift downward. If employment remains constant, this creates a positive bargaining gap, which is inherently inflationary. This inflationary pressure is represented graphically as an upward shift of the Phillips curve, leading to a higher inflation rate at any given level of employment.
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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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Figure 4.20b: Negative Supply Shock (Higher Markup) with Unchanged Aggregate Demand
Cost-Push Inflation from a Negative Supply Shock (e.g., Oil Price Rise)
Figure 4.24: Illustration of a Cost-Push Inflationary Spiral from an Oil Shock
Analyzing an Economic Shock
Consider an economy in equilibrium where a sudden, negative supply shock occurs, such as a significant increase in the price of imported oil. If aggregate demand policies hold the level of employment constant in the immediate aftermath, what is the direct consequence for the wage-setting (WS) and price-setting (PS) curves and the resulting bargaining gap?
Analyzing the Emergence of a Bargaining Gap
Following a negative supply shock that causes the price-setting curve to shift downward, a positive bargaining gap emerges at the initial level of employment only if the wage-setting curve simultaneously shifts upward.
An economy is initially in a stable equilibrium. A new government policy is enacted that significantly reduces competition from foreign firms. Assuming aggregate demand remains unchanged, arrange the following events in the correct chronological order to show the immediate impact on the labor market.
An economy experiences a negative supply shock due to new government policies that reduce market competition. Assuming aggregate demand holds the employment level constant in the short run, match each economic concept to its correct description in this context.
Evaluating Policy Responses to a Supply Shock
Consider an economy initially at its supply-side equilibrium. A government enacts new protectionist policies, which reduces competition and allows domestic firms to increase their profit markups. In the immediate aftermath, monetary and fiscal policies hold the overall level of employment constant. Which statement provides the most accurate analysis of the labor market at this point?
Consider an economy where a negative supply shock causes the price-setting curve to shift downward. In this scenario, the new long-run equilibrium for the economy will involve a higher level of employment than before the shock.
When an economy-wide shock reduces the real wage that firms can profitably offer, but the level of employment remains unchanged, the resulting difference between the wage workers demand and the wage firms offer is known as a positive ____ ____.
Protectionist Policies as an Inflationary Supply Shock
Figure 4.20a: A Negative Supply Shock Opening a Bargaining Gap
Learn After
The Accelerating Wage-Price Spiral
Profit-Push Inflation (Sellers' Inflation)
Immediate Stagflationary Outcome of a Negative Supply Shock
Dual Challenge of Higher Inflation and Unemployment from a Persistent Supply Shock
Consider an economy where, following a sudden and significant increase in the price of an essential imported production input, policymakers initially do not intervene and the overall level of employment remains unchanged. Which statement best analyzes the immediate impact of this event on the economy?
An economy that heavily relies on imported oil experiences a sudden and sustained increase in global oil prices. Assuming the overall level of employment in the economy does not change in the short term, arrange the following events in the correct logical order to show how this shock leads to higher inflation.
Analyzing an Inflationary Shock
The Role of the Bargaining Gap in Inflation
In an economy where the level of employment is held constant, a sudden and significant increase in the price of a key imported raw material will cause the Phillips curve to shift downward, indicating lower inflation at the current employment level.
Following a sudden, sharp increase in the price of a key imported production input, an economy experiences inflationary pressure. Match each component of this economic process with its correct description.
Explaining the Inflationary Impact of a Supply-Side Shock
The term 'cost-push inflation' is used to describe the price increases following a negative supply shock (e.g., a rise in oil prices) because the shock directly impacts firms' production costs. In the standard macroeconomic model that explains this phenomenon, the initial impact is represented by a downward shift of the ______.
An economy experiences a significant increase in its overall inflation rate. An economist claims this is a classic case of cost-push inflation originating from a negative supply shock. Which of the following pieces of evidence would provide the strongest support for this specific claim, as opposed to other potential causes of inflation?
An economy experiences a sudden, sharp increase in its inflation rate. During this period, the national unemployment rate remains stable, and data shows that, on average, corporate profit margins have decreased. Two economists are debating the cause. Economist A argues it's due to excessive consumer spending. Economist B argues it's due to a recent global event that raised the price of essential imported industrial components. Based on the provided evidence, which economist's explanation is more plausible, and why?
Figure 5.7: Multi-Panel Diagram of a Negative Supply Shock's Immediate Impact
Origin of the Policy Dilemma from a Negative Supply Shock