Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible, then ________.

Question

Quizplus · Accepted Answer

When a central bank commits to an inflation rate target and the commitment is credible, the public's expected inflation will remain unchanged. This is because the public trusts the central bank to take whatever actions are necessary to meet the inflation target, even in the face of negative aggregate demand shocks.

Suppose That There Is a Negative Aggregate Demand Shock and the Central