The expectations-augmented Phillips curve is: u = u* − α(π − πᵉ). An adverse oil price supply shock occurs. Which correctly describes short-run and long-run consequences?

A permanent adverse supply shock raises structural unemployment (u* rises) — higher oil prices permanently raise production costs, lowering equilibrium employment. Both the short-run and long-run Phillips curves shift right. If the shock is temporary (option A): economy eventually returns to original u*. Option (C) is the general answer covering the permanent case. Option (D) is wrong: supply shocks directly shift the Phillips curve (stagflation = simultaneous rise in u and π). Option (B) is wrong: a supply shock shifts the curve, does not move along it.