Wage-Price Spiral from a Cost-Push Shock
A wage-price spiral is a dynamic process that can be triggered by a cost-push shock, such as increased union power. After the initial shock raises inflation, workers and firms begin to expect higher inflation in the future. These updated expectations cause the Phillips curve to shift upward, leading to another round of inflation. This cycle of rising expectations and upward shifts in the Phillips curve can result in a continuous, year-over-year increase in inflation if not addressed by policy intervention.
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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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An economy has a stable and expected price increase rate of 2% per year. Following new legislation that strengthens workers' collective bargaining rights, labor unions negotiate a total nominal wage increase of 5% for the upcoming year. If businesses in this economy typically adjust their prices to fully offset any changes in their labor costs to maintain their profit margins, what is the most likely immediate outcome?
Analyzing an Inflationary Episode
An economy is experiencing stable inflation. A new law significantly increases the bargaining power of labor unions. Arrange the following events in the logical sequence that would lead to a higher rate of inflation.
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The Mechanism of Wage-Push Inflation
If labor unions in an economy successfully negotiate a nominal wage increase that is exactly equal to the prevailing expected rate of inflation, this action, on its own, will cause the rate of inflation to accelerate beyond the expected rate.
An economy, initially with an expected inflation rate of 3%, experiences a series of events that lead to a higher inflation rate. Match each event with its correct role in this inflationary process.
Analyzing a Wage-Driven Inflationary Shock
Evaluating a Policy Claim
Identifying the Source of an Inflationary Shock
Wage-Price Spiral from a Cost-Push Shock
Learn After
Analyzing Persistent Inflation
Following a significant, economy-wide increase in negotiated labor costs (a cost-push shock), a self-perpetuating inflationary cycle can begin. Arrange the following events to correctly illustrate the sequence of a wage-price spiral.
An economy experiences a one-time supply shock that raises production costs for all firms, leading to an initial increase in the inflation rate. For this single event to trigger a persistent, self-perpetuating wage-price spiral, which of the following mechanisms is most essential?
The Dynamics of a Wage-Price Spiral