Consider an economy where households and firms have strong confidence in the central bank's commitment to maintaining a low and stable rate of price increases over the long run. If this economy experiences a sudden, temporary increase in global energy costs that pushes up the current inflation rate, what is the most probable effect on the short-run trade-off between inflation and unemployment?

Central Bank Credibility and Inflation Shocks

Expectations and Economic Shocks

In an economy where the public strongly believes the central bank will maintain its long-run inflation target, a temporary negative supply shock (e.g., a sudden oil price spike) will cause a permanent upward shift of the short-run trade-off relationship between inflation and unemployment.