Cost-push shocks can be caused by factors such as fluctuations in monopoly mark- ups or changes in distortionary taxes which change prices but which do not imply any change in the socially optimal level of real output.
What are non-optimal ‘cost-push’ shocks?
The presence of non-optimal ‘cost-push’ shocks is one such case. Cost-push shocks can be caused by factors such as fluctuations in monopoly mark- ups or changes in distortionary taxes which change prices but which do not imply any change in the socially optimal level of real output.
What causes cost-push shocks?
Cost-push shocks can be caused by factors such as fluctuations in monopoly mark- ups or changes in distortionary taxes which change prices but which do not imply any change in the socially optimal level of real output. Such shocks are particularly interesting and relevant because they create a potential policy dilemma for the monetary authority.
What is the meaning of cost push inflation?
Cost-push inflation is a situation in which the overall price levels go up (inflation) due to increases in the cost of wages and raw materials. ... Cost-push inflation develops because the higher costs of production factors decreases in aggregate supply (the amount of total production) in the economy.
How do fixed-price and flexible-price output respond to cost-push shocks?
Fixed-price output is insulated against cost-push shocks while flexible-price output responds to cost-push shocks in exactly the same way as it responds to labour-supply shocks (see (30)). This highlights the fundamental differences between labour-supply shocks and cost-push shocks.
What Is a Supply Shock?
A supply shock is an unexpected event that suddenly changes the supply of a product or commodity , resulting in an unforeseen change in price. Supply shocks can be negative, resulting in a decreased supply, or positive, yielding an increased supply; however, they're often negative. Assuming aggregate demand is unchanged, a negative (or adverse) supply shock causes a product's price to spike upward, while a positive supply shock decreases the price.
What happens when a supply shock is negative?
A positive supply shock increases output causing prices to decrease due to a shift in the supply curve to the right, while a negative supply shock decreases production causing prices to rise.
Why is Glencore a supply shock?
The struggles of a single firm can cause a supply shock if the company is a large producer of high demand products such as copper. According to CNBC, this was the case when Glencore announced in September 2015 its plans to close two major copper mines in the Democratic Republic of Congo and Zambia, removing 400,000 tonnes of copper from the global output. The decision came in response to a prolonged slump in copper prices. Therefore, this particular supply shock was positive for competing firms.
How did copper prices drop?
According to The Economist, a slowdown in Chinese demand for copper caused copper prices to drop. For the previous decade, demand had grown at an annual rate of more than 10% until it fell to 3% to 4% in 2015. This drop in price highlights how a concentrated change in demand can influence prices. A change in demand must be abrupt and perceived as temporary to qualify as a shock, as is the case on the supply side.
