The country of Padua is in long-run equilibrium and has an annual inflation rate of 2 percent. Suppose Padua is hit by a temporary AS shock that causes its inflation rate to double to 4 percent.

(a) Evaluate the options that are available to policymakers in Padua in responding to the inflation shock. (Explanation)

(b) Suppose prior to the shock, the central bank of Padua had adopted a formal inflation target equal to 2 percent. Discuss the implications of such a target for policy options in response to the shock. (Explanation)