Inflation Dynamics Following a Supply Shock

Imagine an economy experiences a sudden, significant increase in the price of imported raw materials. If the public generally believes that the central bank will successfully maintain its long-term inflation target, what is the most probable consequence for inflation over the medium term?

Following a significant, unexpected increase in energy prices, an economy begins to experience a self-perpetuating wage-price spiral because inflation expectations have become unanchored. Arrange the following events in the logical sequence that describes this process.

Inflation Persistence and Expectations

Contrasting Inflationary Outcomes from a Supply Shock

An economy experiences a sudden, large increase in the cost of production due to external factors. Which of the following subsequent developments would be the strongest indicator that this initial price shock is likely to evolve into a period of sustained, high inflation?

An economy experiences a significant, unexpected increase in production costs. Match each type of public expectation about future inflation to its most likely outcome.

In an economy where the public has strong confidence in the central bank's commitment to price stability, a sudden and significant increase in global energy prices is more likely to cause a temporary spike in the price level than a long-lasting acceleration of the inflation rate.

Comparative Inflationary Responses to a Supply Shock

Central Bank Credibility and Inflation Persistence