When an anti-inflation policy is credible,
A)a new long-run equilibrium at a lower inflation rate is reached much faster
B)the sacrifice ratio is zero
C)the Fed can cheat a little by letting money supply grow to avoid a recession
D)real wages immediately adjust and thus no increase in the rate of unemployment is needed to reduce inflation
E)there is no need for workers to adjust their wage demands, so the economy will adjust more easily to a new long-run equilibrium

Question

Quizplus · Accepted Answer

A credible anti-inflation policy sends a signal to the public that the central bank is serious about reducing inflation, leading to a rapid adjustment of expectations and making it easier to achieve a lower inflation rate in the long run. This means that a new long-run equilibrium at a lower inflation rate can be reached much faster.

When an Anti-Inflation Policy Is Credible