An economy with stable employment and inflation experiences a sudden, permanent increase in the price of a key imported resource, causing an initial jump in inflation. In the years that follow, inflation continues to rise steadily. Which of the following best explains the underlying reason for this persistent, accelerating inflation?

Policy Response to a Supply Shock

Following a sudden and permanent increase in the cost of production inputs, an economy experiences an initial rise in inflation. If the level of employment subsequently falls and stabilizes at a new, lower level where firms' desired profit margins and workers' real wage claims are once again consistent, the initial inflationary pressure will continue to fuel a persistent wage-price spiral.

Sustaining a Wage-Price Spiral

An economy is in a stable equilibrium with constant inflation. A sudden, permanent increase in the price of oil occurs, but the level of employment is maintained. Arrange the following events to show the resulting wage-price spiral in the correct chronological order, starting from the initial impact of the shock.