Persistent Energy Shock
The question
Assume the economy of Kesland is operating at its natural rate of unemployment with stable, fully anticipated inflation. A lasting conflict among major oil exporters keeps energy prices sharply and persistently elevated, raising per-unit production costs across Kesland's firms. Assume the structural and frictional determinants of the natural rate are unchanged. Show the short-run effect of this change in the Phillips curve model. Show the effect on the Phillips Curve graph.
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Persistent Energy Shock: the worked answer
On the Phillips Curve graph, SRPC shifts up (right).
Why SRPC shifts up (right)
Persistently higher energy prices are an adverse supply shock that raises firms' per-unit production costs, so the inflation rate associated with any given unemployment rate rises and the short-run Phillips curve shifts up and to the right. As households and firms come to expect this higher inflation, that expectation is built into nominal wage and price setting, reinforcing the upward shift. The natural rate of unemployment is set by structural and frictional factors, which the prompt holds constant, so the long-run Phillips curve does not move.
What happens to the equilibrium
At the natural rate of unemployment the economy now faces a higher inflation rate, so every short-run unemployment-inflation combination carries more inflation than before.
The mistake students make on this one
A common wrong answer is to shift the SRPC left because an oil shock is bad news and students associate bad news with a leftward move. On this graph the horizontal axis is unemployment, so left means less inflation AND less unemployment, which is the opposite of stagflation.
On exam day
Adverse supply shock means stagflation, and stagflation on the Phillips curve is the upper-right direction: more inflation paired with more unemployment. Pair it with SRAS shifting left on AD-AS so the two graphs always tell the same story.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when SRPC shifts up (right) and every other curve on the Phillips Curve graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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