The Central Bank's Policy Trade-off
Following a sudden, negative shock to an economy's productive capacity (e.g., a sharp rise in energy prices), a central bank with a mandate to keep inflation low and stable is faced with a difficult choice. Analyze the trade-off between controlling inflation and maintaining the level of employment in this scenario. In your response, explain why attempting to keep employment at its pre-shock level would lead to rising inflation, and conversely, why actions taken to control inflation would necessarily lead to a fall in employment.
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