The difference in outcomes occurring with a credible nominal anchor and without one, given a positive aggregate demand shock is that ________.

Question

Quizplus · Accepted Answer

With a credible nominal anchor, the central bank's commitment to a specific inflation target serves as an anchor for inflation expectations. This makes it easier for businesses and individuals to form expectations about future inflation, which helps to stabilize the economy. Without a credible anchor, inflation expectations may become unmoored, leading to higher inflation and potentially destabilizing the economy. A positive aggregate demand shock would lead to higher output and higher prices in both cases, but with a credible anchor, there would be no shift in the aggregate supply curve because inflation expectations are anchored around the target.

The Difference in Outcomes Occurring with a Credible Nominal Anchor