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

Question

Quizplus · Accepted Answer

With a credible nominal anchor, such as a commitment to a specific inflation target, households and firms will have greater confidence in the central bank's ability to stabilize prices. This can prevent inflation expectations from becoming unanchored and potentially leading to a positive supply shock, which would shift the aggregate supply curve to the left. Without a credible nominal anchor, inflation expectations could spiral upwards, leading to higher inflation and potentially shifting the aggregate supply curve to the left. However, a credible policy does not necessarily shift the aggregate supply curve back quickly, as that would depend on the specific factors affecting the economy.

The Difference in Outcomes Occurring with a Credible Nominal Anchor